Gathering tax documents is such a joy. Having to store the documents for several years is even more joyful. How long do you need to wait before getting rid of tax documents?

Suggested Retention

• Tax returns, supporting schedules, and W-2s should be kept forever.  The documents may be needed to prove earnings and credits when applying for social security.
• Receipts, bank statements, and other supporting documents should be kept for at least six years.  If the IRS accuses you of under reporting income, they can audit six years of tax returns.
• Documentation for fixed assets, depreciation, and amortization should be kept for six years, but the receipt date is effectively the date the asset was sold or disposed of.

When does the Clock Start?

The six year retention clock starts on the due date of the filed tax return, not the date on the receipt.  If a tax return is extended, the retention period begins with the due date for the extended return.  To make things simple,...

Most likely, no.  The exact answer depends on the type of tax return filed for the law firm.

Firms that file as C Corps (Form 1120)

Firms that file as C Corps are able to directly deduct donations made to charity.  However, charitable donation deductions are limited to a maximum of 10% of net income.  Since most small C Corps are run to report nearly $0 taxable income each year, they are unable to deduct charitable donations.  Disallowed charitable donation amounts are lost and cannot be carried forward or transferred to shareholders.

Firms that file as S Corps (1120S), Partnerships (1065), and Sole Proprietors (Schedule C)

A little better news, but still not the answer most people expect.  For these firms, charitable donations are transferred from the firm and reported as itemized deductions for the owners.  The donation can be reported on the law firms financial statements, but the donation amount is removed from deductible expenses when the income...

Series

• Introduction
• Legal Entities
• Tax Options
• W-9s
• Closing Comments

Table depicts legal entity options available for law firms and corresponding tax return options.

Client received a $1,560 invoice from your law firm.  Client decided to round off the amount and mailed a check for $2,000.

Options for depositing the $2,000 check.

• Deposit the full $2,000 to the operating account.  Incorrect.  The $2,000 check includes $440 of funds the firm has not earned.  Unearned funds are never deposited to the operating account.
• Split the deposit via banker voodoo.  $1,560 is deposited to operating and $440 is deposited to IOLTA.  The state trust accounting guides advise against this process.  While the funds to end up in the correct bank account, the audit trail is messy.
• Deposit the full $2,000 to the IOLTA account, wait for funds to clear, and transfer $1,560 from IOLTA to the operating account.  Correct.

If your law firm does not have an IOLTA account, return the payment to the client and request a payment for $1,560.  Or quickly open an IOLTA account.

Yes, preprinted deposit slips are required.

Appendix B-1 of the 2014 Arizona Client Trust Accounting for Arizona Attorneys guide states “Deposit slips should always be printed with the name of the lawyer or law firm, IOLTA or Trust Account Designation, account number, and routing number.”

We see increased levels of bank and trust accounting errors when law firms do not use preprinted deposit slips.  Without a preprinted account number on the deposit slip, the bank will frequently deposit IOLTA funds into the firm’s operating account.

Suggested Deposit Slips

• Our law firms buy 1-Part deposit slips.  Our accounting process produces a report that acts as equivalent duplicate deposit slips.
• Deluxe Deposit Slips – Item# 100018 $47.99 for 400 deposit slips.
• ChecksForLess.com Deposit Slips – Item# D30A $23.95 for 400 deposit slips.

Deposit Slip Format

Include a reference to IOLTA account on the deposit slip.

The Law Firm, PLLC
IOLTA Trust...

Most likely, no.  The exact answer depends on the type of tax return filed for the law firm.

Firms that file as C Corps (Form 1120)

Firms that file as C Corps are able to directly deduct donations made to charity.  However, charitable donation deductions are limited to a maximum of 10% of net income.  Since most small C Corps are run to report nearly $0 taxable income each year, they are unable to deduct charitable donations.  Disallowed charitable donation amounts are lost and cannot be carried forward or transferred to shareholders.

Firms that file as S Corps (1120S), Partnerships (1065), and Sole Proprietors (Schedule C)

A little better news, but still not the answer most people expect.  For these firms, charitable donations are transferred from the firm and reported as itemized deductions for the owners.  The donation can be reported on the law firms financial statements, but the donation amount is removed from deductible expenses when the income...