Year-End is Approaching, Get Your Financials in Order
10.31.22 | Practice Made Perfect
Another challenging year for the legal industry is about to end, and reviewing the firm’s finances before year-end is critical for positioning the organization for financial success. Now is the time firms should methodically review their records, close on outstanding receivables, and budget for the year ahead, to prepare for a stronger 2023. Here are some things firms should be focusing on:
Billing and Collections
It is imperative that the Q4 push for billing and collecting starts in October and November instead of waiting until December. Communicate the importance for partners to speak with clients now about any potential billing issues. If a partner must negotiate discounts, this should be done before billing so the firm can collect outstanding fees more efficiently.
Year-End Tax Planning
Meetings should be scheduled with the firm’s accountants to discuss year-end projections so that estimated tax payments needed to be made prior to year-end, if applicable, are accurate. Additionally, for cash basis taxpayers, prepayments of certain 2023 expenses should be considered in order to minimize 2022 tax liability.
New York City Unincorporated Business Tax
As remote working has become more prominent over the past few years, there is an opportunity for New York City firms to lower their NYC allocation percentage and save significantly on Unincorporated Business Tax (UBT). NYC apportionment is based on place of performance, so if a firm’s employees have been providing legal services outside of the five boroughs, this should be tracked and provided to the firm’s tax accountant prior to the filing of the tax return.
State and Local Tax Planning
Since the pandemic, there has been a significant increase in remote workers who have moved out of state or even out of the country. This can create a variety of nexus and apportionment issues and new state tax filing and withholding requirements. To stay ahead of this, firms should know where their employees are working and consult with their tax advisors to help reduce the impact the pandemic may have had on their overall state and local tax liability.
NYC Pass-Through Entity Tax
For the Partnerships and S-Corporations that have elected into New York State’s Pass-Through Entity Tax (PTET) program for 2022, discussions should take place with the partners’ tax accountants to determine whether an election into the 2022 NYC PTET program is going to be made. The 2022 election deadline is not until March 15, 2023; however, if electing for 2022, it is encouraged that this is done as soon as possible so that an estimated tax payment can be made before December 31, 2022.
This is an opportune time for firms to examine their 2023 budget. In particular, look into areas that may have been impacted by the pandemic —marketing, networking, travel, and other firm events, among others. Firms may be able to reduce expenses or reallocate funds into initiatives that may offer short or long-term advantages, such as expanding the use of Artificial Intelligence or other technologies. Keep in mind that the way people work and interact with clients has changed substantially in the last couple of years. To address this, it may be necessary to reallocate funds to support these changes.
CARES Act Social Security Tax Deferral
For employer’s who elected to defer the deposit and payment of the employer’s share of Social Security taxes owed on wages paid from March 27, 2020, through December 31, 2020, the due date for the 2nd half of the deferred amount is December 31, 2022 (extended administratively to the next business day, Monday, January 3, 2023.) Thus, it is imperative that the 2nd half of the payment is made by the aforementioned date.
With many employees working from home and sharing information over unsecured connections, firms must be attentive to their IT and cyber protection. Suspicious cyber activity over the past few years has surpassed every previous year’s benchmarks. As employees continue to work outside of the office, firms need to ensure that their clients’ confidential and privileged information is safe. It is strongly encouraged that firms hire an outside consultant to evaluate their IT policies and procedures. To learn more about the need for a more vigilant cybersecurity program, click here.
Staying on top of these items is critical to a law firm’s year-end and future success. Firms that require guidance on these or any other business matters should reach out to Chris Imperiale at 212.331.7590 | CImperiale@berdonllp.com or your regular Berdon advisor.