Many plaintiffs are surprised to find their settlement funds are taxable. The amount and whether or not the funds are entirely taxable is dependent on several key items. Lawyers who are responsible for providing clients with a settlement sheet, so it’s important to keep this in mind throughout the process. Key items to note include the following[1]: Punitive damages and … Read More
What is the statement of cash flows for law firms?
The statement of cash flows, sometimes alternatively referred to as the cash flow statement, shows law firms where the cash is coming in and where it’s going. On the report, the cash flow statement will list inflows and outflows into helpful line items. It includes cash from investing returns, operating activities and financing/borrowing. This statement provides firms with a short-term … Read More
How should our firm record matter costs?
Matter costs need to be properly recorded in the accounting records due to their tax implications and compliance requirements. To track these costs properly, firms need to determine which category an expense falls into: hard cost or soft cost. Hard costs are any advanced payments the firm puts out to cover matter expenses. These types of costs are typically passed … Read More
What Should Be Included in a Settlement Statement?
Once settlement funds are received and deposited into the trust account, a lawyer should always draft a settlement statement. This statement shows the proposed distribution of the funds to cover fees, case expenses and any outstanding payables associated with the matter. The purpose of the statement is to make it clear to the client how the money is being handled … Read More
How do I read my law firm’s balance sheet?
The balance sheet provides a crucial tool in understanding your firm’s financial health at a glance and determine its current value. Many accounting programs can easily produce this report for you. Not only can this help guide decisions, but you may also need to present this information in order to obtain a loan. The balance sheet follows a straightforward formula: … Read More
Is recovering advanced client costs taxable?
Correctly allocating advanced client costs to ensure the appropriate tax impact is applied is critical in order to avoid the Internal Revenue Service (IRS) audits and violations. These costs need to be allocated directly as hard (direct expenses) or soft costs (support expenses), with the tax treatment being applied differently to each. Hard costs as those associated with payments for … Read More
How do invoice payments need to be allocated?
Not all invoice payments can be directly recorded as revenue, and doing so can have negative repercussions for the firm including an unnecessary tax liability. Law firms need to apply payments in the appropriate order once payments are received. Payments should be applied in the following order once taken in: Taxes Cost recovery, including reimbursable client costs Late fees and … Read More
What steps are involved in administering payroll?
Administering payroll is a must if you want to keep your employees happy and avoid penalties come tax time. You need to make sure you’re doing it correctly and consistently, and following a process can help. Here’s a sample process that can be used to make sure every step has been completed: Update for any changes in employee information. Make … Read More
Can general accounting programs like QuickBooks generate required legal reports?
There are some specific reports that law firms are required to generate due in order to meet ethical obligations – such as a three-way reconciliations report for trust accounts. But there are also other non-trust account-related reports that attorneys are required to produce in certain situations. For example, under the lodestar method of calculating a reasonable attorney fee recovery, the … Read More
Why are accounts receivables considered an asset?
When a law firm provides services and issues an invoice for those services, the law firm is essentially extending credit to the client. Your firm’s accounts receivable (A/R) tracks the amount each client owes for services rendered in the past, e.g. the amount of credit your firm has extended to each client.[1] (Attorneys can avoid having to extend credit to … Read More