Since 1982, the IRS has ruled that contingent-fee related case costs paid by law firms are actually loans to the client, or advances made on the client’s behalf that the law firm expects to recover. The IRS ruling further states that those costs may NOT be deducted as a business expense on the law firm’s tax return. If selected for an audit by the IRS, accounting for client case costs as a business expense, could result in significant fines and penalties and a potentially sizable tax bill for the law firm. According to the IRS ruling, case costs related to contingent-fee cases should be reported for accounting and tax purposes in the asset section of a law firm’s Balance Sheet.
Are you applying the correct accounting treatment to contingent-fee client case costs?
If you use QuickBooks, this short video will provide you with information to help you make sure your law firm is adhering to the proper accounting treatment of client case costs and if you’re not, it will demonstrate steps to get you on the right track.
If you have questions or would like additional information on this issue, please contact us via email at QBSupport@AdvocateCapital.com.
Because these costs represent a non-deductible expenditure of a law firm’s cash resources, they essentially sit on the law firm’s books as a receivable – often for years, while the law firm works to achieve justice on behalf of its clients. Advocate Capital, Inc. provides contingent-fee law firms with strategic business solutions to help law firms address this important financial issue.
If you would like to talk a representative about how the Advocate Capital, Inc. program may be able to help your Practice, visit our website www.AdvocateCapital.com or call us toll free at 877-894-9724.
Senior Vice President, Client Services