How is it Possible That I OWE Taxes at My Firm? 

Here at CathCap, we provide CFO services for attorneys. It is our role to help you profit, which means that we are typically deep in the weeds when it comes to understanding and managing a firm’s financials. Some of the questions and concerns that we frequently get from the law firms that we work with surround taxes. Specifically, questions like:

I spent all my profits on stuff for my law firm – how can I owe taxes?

  • Why did my tax guy tell me I owe a huge amount?

  • I ended the year with less money in the bank account than I started with. If I didn’t profit, shouldn’t I owe no taxes?

Most of the time, the mistake that these attorneys are making is that they’re looking at their cash on hand when what they should be looking at is their net income line on their Profit and Loss.

Where is Your Money Going?

We get a lot of questions about taxes here at CathCap, often asked things like “why do my taxes say I’m making more than I’m bringing home?”

A while back we worked with a client named Robert. He had run an up and down law firm. They had their good years, but they also had their bad years, and so while his law firm was doing “okay,” it also had a lot of debt.

We worked with him for a while and we were able to make his firm a lot more profitable. In fact, he was making a lot more money, and finally had a bunch of extra money in the bank.

So we told him that, now that he’s profitable and has some money in the bank, the best thing he can do for his long-term finances is paying down some of his debt.

Robert agreed.

But then he took all of his extra money and paid down his debt with it. His reasoning was: “if I pay down my debt and have no money left, not only do I have a lot less debt, but I also owe no taxes.”

It doesn’t work that way.

See, when he took out his loans, he used them on things like payroll. Payroll is a tax deduction, so his loans technically already went to a tax write-off. He’s not allowed to take yet another tax break paying off the debt that he accrued. That would be double-dipping.

There are a lot of expenses like that, termed “Below the Line Expenses.” These are expenses that occur with post-tax income. Paying off debt is an example of this type of tax. Major purchases can be another one. Many of the purchases you make are expected to be with after-tax dollars.

Another big one is draws. If you took money out for yourself, that money is expected to be taxed.

Now, your tax situation is unique to you, and we’ve found that some of these large tax bills aren’t entirely your fault – they can be the fault of bad advice you got from an accountant, or financial advisor, or another attorney that gave you tax advice.

But that’s also why it is so important to have an understanding not only of how your taxes and finances work, but also how to pick financial experts that are knowledgeable and able to help you save money on taxes the right way.

Here at CathCap, we’ve created some free resources to help you get a better understanding of managing your finances, how to identify a good bookkeeper/accountant and more. If the scenario described above sounds similar to some of the issues that you’ve experienced in the past, we encourage you to click here. As always, if you’d like to speak to CathCap directly about how our CFO services for attorneys work, please click here to schedule an appointment and meet with one of our team members.

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