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Deferring Income vs. Accelerating Deductions: How Lawyers Can Benefit
As a lawyer, tax planning isn’t just about filing on time—it’s about making strategic decisions that reduce your taxable income and maximize your savings. One of the most powerful tools in your tax arsenal is knowing when to defer income and when to accelerate deductions.
The end of the year is an ideal time to assess your tax situation and determine whether these strategies could work for you. Whether you’re a solo attorney or managing a law firm, taking action now could result in significant tax savings before December 31.
Here’s how you can use deferring income and accelerating deductions to benefit your practice and reduce your 2024 tax bill.
1. Understand the Benefits of Deferring Income to Reduce 2024 Taxable Income
Deferring income means postponing the receipt of income until the next tax year, allowing you to avoid or reduce taxes on that income for the current year. This strategy is particularly useful for lawyers with fluctuating income or those who have had a high-earning year and are looking to avoid jumping into a higher tax bracket.
When deferring income makes sense:
- If your 2024 income is higher than expected and you’re at risk of entering a higher tax bracket, deferring some income until 2025 could help you avoid paying higher taxes on that additional income.
- If you anticipate having lower income in 2025, deferring income now means you’ll pay taxes on it at a lower rate next year.
How to defer income:
- Delay client invoicing: If you have work completed but haven’t yet invoiced clients, consider waiting until January to send out the invoice. This moves the taxable income to next year.
- Postpone settlements: If you expect a large settlement payment before the end of the year, consider negotiating to receive the payment in early 2025.
Pro Tip: Deferring income is only beneficial if you expect your tax bracket to decrease in 2025. Work with your CPA to assess whether deferring income makes sense for your specific situation.
2. Accelerate Business Expenses to Increase Deductions for the Current Year
If deferring income doesn’t make sense for you, another option is to accelerate your deductions by prepaying business expenses. This strategy can help reduce your taxable income for the current year by allowing you to claim more deductions before December 31.
Examples of deductible expenses to accelerate:
- Office supplies: Stock up on essential supplies like paper, toner, and technology. Purchasing these items before year-end allows you to deduct the costs for 2024.
- Software and subscriptions: Prepay for legal software, research platforms, or subscription services like Westlaw or LexisNexis. These expenses can be deducted this year, even if the service extends into 2025.
- Marketing and advertising: If you plan to launch a marketing campaign in 2025, paying for ads or promotional materials now lets you take advantage of the tax deduction this year.
Pro Tip: Make sure that any prepayments you make are for expenses that will be used within 12 months, as the IRS requires that prepaid expenses must generally be used up within the next year to qualify for a deduction.
3. Adjust Receivables and Payables Based on Cash vs. Accrual Accounting
Your firm’s accounting method—whether it’s cash-basis or accrual-basis accounting—impacts how and when income and expenses are recognized. Understanding how these methods work can help you make smarter decisions about deferring income or accelerating deductions.
- Cash-basis accounting: Income is recorded when it’s received, and expenses are recorded when they’re paid. If your firm uses cash-basis accounting, deferring income and prepaying expenses will directly affect your tax liability for the year.
- Accrual-basis accounting: Income is recorded when earned, and expenses are recorded when incurred, regardless of when payment is made. This means deferring income is less effective, but you can still accelerate expenses by incurring them before year-end.
Pro Tip: If your firm is on a cash-basis accounting method, deferring income and prepaying expenses are especially effective for managing taxable income at year-end.
4. Time the Purchase of Office Supplies or New Software for Optimal Deductions
One of the easiest ways to accelerate deductions is to time your purchases strategically. By purchasing office supplies, upgrading technology, or subscribing to new software before December 31, you can increase your deductions for the year, reducing your taxable income.
Purchases to consider making now:
- New computers or office equipment: Any technology or office upgrades purchased before year-end can be deducted under Section 179, which allows businesses to deduct the full purchase price of qualifying equipment in the year it’s bought.
- Legal software: If your firm is planning to upgrade its software or renew licenses, doing so before December 31 means you can claim the deduction this year.
- Continuing education: If you or your associates need to complete CLE (continuing legal education) requirements, prepaying for courses now allows you to claim the deduction immediately.
Pro Tip: Take advantage of Section 179 deductions, which allow you to deduct up to $1,160,000 in 2024 for new equipment and technology used in your business.
5. Consider Deferring Bonuses or Salary Increases Until Next Year
If you’re a managing partner or solo attorney, you may have flexibility in when you pay yourself or your associates. By deferring bonuses or salary increases until January, you can reduce your firm’s overall taxable income for 2024.
Why defer bonuses or salary increases:
- If your firm has had a particularly profitable year, deferring these payments allows you to keep more income in the firm while lowering your 2024 tax burden.
- By pushing bonuses or salary increases to 2025, you spread out your tax liability over multiple years, which could keep you in a lower tax bracket for both years.
Pro Tip: Deferring compensation only makes sense if your firm’s cash flow allows for it, so consult with your CPA before making any decisions.
Why Deferring Income and Accelerating Deductions Matter for Lawyers
For lawyers and law firms, year-end tax planning is a crucial part of minimizing tax liability and ensuring the financial health of your practice. By deferring income or accelerating deductions, you can control when and how much income you’re taxed on, allowing you to keep more of your hard-earned money.
The bottom line: Strategic tax planning isn’t just about compliance—it’s about maximizing your savings and ensuring that your firm is financially prepared for the future.
Need Guidance? Let Us Create a Tax-Saving Strategy for Your Firm!
At Prestige Accounting and Consulting, we specialize in creating tailored tax strategies for lawyers and law firms. Whether you need help deferring income, accelerating deductions, or managing cash flow, our team of experts is here to guide you through the complexities of tax planning.
Contact us today to schedule a consultation and get started on a tax-saving strategy that works for your firm.
