Law Firm Tax Preparation: 6 Things to Review Before Sending Financials to Your CPA
Tax season stresses a lot of law firms out, but the pressure rarely comes from the taxes themselves. In most cases, the stress comes from pulling financial records together after a year of erratic bookkeeping. When law firm tax preparation begins, many firms realize their financials are not CPA ready.
Keeping financials clean and up to date throughout the year makes the tax process move smoothly with minor stress to the firm and its administrators and managers. Your CPA reviews the reports, asks a few questions, and prepares the return. Disorganized books turn tax season into a scramble to sort through months of transactions and reconcile accounts.
For solo and small law firms in particular, taking a little time to review your financials before sending them to your CPA makes the entire process significantly smoother. Juriscend compiled these tips using our firsthand experience managing billing, bookkeeping, and financial reporting inside a law firm. Below are six areas that most often slow tax preparation down.
A Pre-CPA Financial Review for Law Firms
Before sharing your reports, take a few minutes to review six areas that commonly slow tax preparation down for law firms:
• Financial statements and reconciliations
• Trust and IOLTA accounts
• Owner distributions
• Payroll activity
• Revenue and outstanding invoices
• Uncategorized transactions
Review these reports to make sure your financials are organized and ready for your CPA to review.
1. Confirm your financial statements are accurate
Your CPA relies heavily on your Profit and Loss statement and Balance Sheet to prepare your return, so those reports need to reflect accurate numbers. Before sending them over, confirm that you reconciled every bank account and credit card and that the balances match your statements.
When you reconcile accounts consistently throughout the year, your financial reports become far more reliable and much easier for your CPA to review.
2. Review trust and IOLTA accounts
Review your trust accounting carefully before tax preparation begins. Confirm that you reconciled all trust accounts and remember your trust account must match your trust liability account.
Any transfers from trust to the operating account should clearly reflect revenue your firm earned through billing. Clean trust accounting protects your clients, protects your firm, and keeps your financial reporting compliant. Trust compliance is a three-way reconciliation.
3. Separate owner distributions from business expenses
Keep owner draws or partner distributions clearly separated from operating expenses. When these transactions become mixed together, financial reports can paint an inaccurate picture of the firm’s performance and create unnecessary cleanup during tax preparation.
Clear, detailed categorization makes it much easier to understand how the firm is actually performing financially.
4. Reconcile payroll activity
Compare your accounting records with the reports provided by your payroll service. Review payroll expenses, payroll tax payments, and payroll liabilities to confirm that everything aligns with the payroll provider’s records.
Resolving discrepancies now prevents unnecessary back-and-forth once your CPA begins preparing the return.
5. Review revenue and outstanding invoices
Make sure your revenue reflects the work your firm actually billed and collected during the year. Review outstanding invoices, payments sitting in undeposited funds, and any transfers from trust to operating accounts.
Clear revenue reporting helps your CPA prepare an accurate return and gives you a more reliable view of your firm’s financial performance.
6. Clean up uncategorized transactions
Look through your books for transactions that were never categorized or fully explained. Suspense accounts, old retainers, or balances without clear descriptions, can easily create confusion for your CPA.
Cleaning up these items ahead of time helps your books tell a clear and accurate story.
The Goal: CPA-Ready Financials
Make tax preparation more predictable by maintaining organized financial systems throughout the year. Your CPA can focus on preparing the return instead of investigating unclear balances or correcting incomplete records.
For many solo and small law firms, the real challenge is maintaining systems that keep everything organized while the firm focuses on serving clients.
Juriscend answers that challenge by running your billing, bookkeeping, and financial reporting so it is organized and CPA-ready, at tax season and all the rest of the year.
If your firm scrambled to prepare financials this year, it may be time to strengthen the systems behind them. You can schedule a complimentary call with us to review your current processes and identify ways to make next year’s tax season much smoother.