Maximizing Tax Deductions Before December 31: A Guide for Attorneys
October 7, 2025
Is Your Entity Structure Hurting Your Tax Strategy?
October 16, 2025
Cash vs. Accrual Accounting: Which Saves More at Tax Time?
There’s a silent tax decision hiding in your books—and it’s costing some lawyers thousands.
Cash vs. accrual accounting isn’t just a question for your bookkeeper. The method your firm uses directly impacts your tax bill, your cash flow, and your ability to scale.
Most law firm owners default to one or the other without understanding what it means—and few ever revisit whether they’re still using the best option for their current size, services, or cash position.
This guide breaks down the differences, tax savings opportunities, and how to choose the right accounting method for your firm.
What Is the Difference Between Cash and Accrual Accounting?
📊 Cash-Basis Accounting
Revenue and expenses are recorded only when money actually changes hands.
You recognize income when a client pays you
You recognize expenses when you pay a bill
📑 Accrual-Basis Accounting
Revenue and expenses are recorded when they’re earned or incurred—regardless of when money moves.
- You recognize income when you bill a client (even if they haven’t paid yet)
- You recognize expenses when you receive a service or invoice
✅ Most Solo and Small Firms Start With Cash Basis (But Should They Stay?)
Here’s why cash basis is so popular in law firms:
- It’s simpler
- It closely mirrors bank account activity
- It can offer tax deferral advantages by letting you delay income or accelerate expenses
- It’s available to businesses that average under $27 million in revenue over the prior 3 years (per IRS 2025 guidelines)
But that doesn’t mean it’s always best.
💸 Which Method Saves You More at Tax Time?
➤ Cash Basis Advantages
- Timing flexibility for year-end deductions (e.g., prepaying expenses or deferring client billing until January)
- Easier for firms with tight cash flow
- More forgiving for contingency-based or unpredictable revenue firms
➤ Accrual Basis Advantages
- Better reflects true financial performance (especially as you grow)
- Helps with profit forecasting and managing team costs
- Makes it easier to match income with related expenses
- Required by many lenders and for GAAP compliance
In short:
|
If you want to…
|
Cash Basis
|
Accrual Basis
|
|
Reduce taxable income this year
|
✅ Best fit
|
⚠️ Limited flexibility
|
|
See when your firm is truly profitable
|
⚠️ Can mislead
|
✅ More accurate
|
|
Run a more complex firm with staff/systems
|
⚠️ Outgrown
|
✅ Scales better
|
⚠️ Real Tax Implications for Law Firms
Many lawyers don’t realize how big a difference this makes until it’s too late.
For example:
A firm bills $100,000 in December but doesn’t receive payment until January.
Cash-basis = No income recognized in December
Accrual-basis = $100,000 of taxable income in December
That one choice could mean the difference between paying $20,000 in taxes now—or later.
💥 Hidden Risks of Sticking With the Wrong Method
- Overpaying taxes by recognizing income too early
- Cash flow crunches if your books say you’re profitable but there’s no money in the bank
- Trouble qualifying for business loans or credit
- Confusion during audits or tax prep due to mismatched records
📘 What the IRS Says About Law Firms and Accounting Methods
Most law firms—especially those with IOLTA accounts—must be mindful of how they handle unearned revenue.
🔗 If your firm collects retainers or prepaid fees, the IRS expects that revenue to stay in trust until earned. Recording it as income too early (even accidentally) can trigger tax liability or ethical issues.
Need help staying compliant with IOLTA while keeping your books audit-ready? Visit FixMyIOLTA.com (Ryan need to share the correct URL link)
🔄 Can You Switch Accounting Methods?
Yes—but you need IRS approval.
To change methods, file Form 3115 (Application for Change in Accounting Method) and meet these requirements:
- Show valid business reason (e.g., growth, complexity, better financial reporting)
- Reconcile prior years’ accounting changes
- Possibly include a Section 481(a) adjustment to avoid double-counting or skipping income
This process should always be handled by a qualified CPA—especially one who understands legal accounting and IOLTA requirements.
🧠 So Which One Should You Choose?
Stick With Cash Basis If:
- You’re a solo or small firm with low overhead
- You manage cash closely and want to time deductions
- You aren’t yet tracking revenue by matter or practice area
Consider Accrual Basis If:
- You’ve grown past DIY spreadsheets
- You run a team, have payroll, and want better forecasting
- You’re preparing for growth, sale, or funding
🎯 Let’s Talk Strategy Before Tax Season Hits
This isn’t a one-size-fits-all decision. The best method depends on your structure, goals, and financial systems.
And if you’re not sure what method you’re using—or if it’s working for you? That’s a red flag.
🗓️ Book your consultation to get answers from a CPA who works only with law firms and will give you the best result.
