The first thing I do when I start working for a new legal firm client, is to do a review of their affairs to ensure everything is in order.  In at least 50% of cases, the financial statements and tax returns are either incomplete or incorrect.  So here are the Top 5 issues with financial statements and tax returns for law firms:

1. They don’t include a value for WIP.
IMPACT: under value equity in practice.
OPPORTUNITY: better debt funding and interest deductibility

2. They don’t include the amount of Unbilled Disbursements.
IMPACT: under value equity in practice.
OPPORTUNITY: better debt funding and interest deductibility

3. The movement in Unbilled Disbursement balances isn’t claimed as an additional tax deduction when it increases in accordance with Tax Ruling TR97/6.
IMPACT: Pay too much tax.
OPPORTUNITY: pay less tax

4. Service entity arrangements are not in line with ATO guidelines.
IMPACT: risk of losing deductibility of service charges.
OPPORTUNITY – simplify structure and utilize benefits of an Incorporated Legal Practice

5. Trust distribution resolutions not prepared before 30 June each year. 
IMPACT: profits tax at highest rate.
OPPORTUNITY: lock in lower marginal tax rates.

So before you have your Firm’s accounts and tax returns prepared this year, just check to make sure they are correct.

Matt Schlyder
The Lawyers’ Accountant
matt@fwo.net.au