It’s no secret that lawyers and law firms have many expenses to cover on a yearly basis. From leasing an office to traveling to court, the costs can add up quickly, and this can sometimes make filing taxes confusing. It’s no surprise, then, that many questions that come up around tax season for lawyers. One common question attorneys wonder is, are continuing legal education credits tax deductible?
The Internal Revenue Service (IRS) permits taxpayers to deduct certain expenses incurred in connection with their occupation. This article explores whether or not continuing legal education (CLE) expenses are considered tax-deductible.
Although the answer is not always straightforward, there are several factors to consider in order to make an informed decision when filing your taxes. Read on for a more detailed analysis of the tax laws surrounding CLE deductions.
How Your Employment Status Affects Taxes
Lawyers are classified within their industry as either an employee, contractor, solo firm, or partnership. This classification can affect the taxes that lawyers are legally required to pay the IRS as well as the deductions that can be availed.
Associates in a law firm are considered employees. This is the same for lawyers who work for the government or those who act as in-house attorneys. For an employee-employer setup, the employer will be the one to withhold taxes for their employees. By the end of the year, employees would receive their Form W-2 or Wage and Tax Statement.
Employees are not allowed to deduct anything for bar dues and fees. Still, some employers may offer reimbursements for education costs.
An independent contractor is typically clustered with the sole proprietorship or self-employed individual. In this case, contractors file Schedule C Form or Profit or Loss from Business (Form 1040). This form reports the income and expenses of the business. This form would normally come with the Schedule SE or Self-Employment Tax. Additionally, the contractor’s clientele would usually provide 1099 forms or 1099-NEC, which include the payments the clients made to the contractor within the tax year.
It should be noted that the term “contractor” refers to the tax status of the person rather than temporary or fixed-term positions, which would then be under the W-2 Employee cluster.
3. Solo Firms
Those who start solo firms are generally clustered alongside independent contractors. When lawyers move towards establishing their own law firm as a Limited Liability Company (LLC), then the taxes would be under a corporation.
If the taxes are for a corporation, the lawyer can then be paid as an employee. Some solo firms would move towards obtaining an S-corporation status to avoid double corporate and personal taxation. This means that there are potential savings on Social Security and Medicare taxes that can be applied.
A partnership means that each partner would have an agreement that entails being taxed individually for their shares. This concept is similar to a solo firm or independent contractor. In this type of employment status, only the partners have shares while the associates and staff are under the W-2 employee cluster.
Can Lawyers Deduct CLE Expenses from Taxes?
Under the business expenses of the IRS (Publication 535), CLE expenses are under the Miscellaneous Expenses, since they’re educational expenses. In order for these education courses to be qualified expenses, it says that the lawyer must be able to “show the education maintains or improves skills required” or that the education must be a requirement.
Since CLEs are required for most states to keep their lawyer’s licenses, it can usually be an approved tax write-off. Still, not all education expenses can be claimed as tax deductions. For instance, if a lawyer enrolls or joins courses that are not related to law, these courses can not be written off on a tax return.
Aside from education expenses, lawyers may also have other tax deductions that may be claimed during the tax year, especially if they’re business owners. However, it is equally important to consult with a Certified Public Accountant (CPA) for tax advice before claiming these or any other expenses as tax cuts.
1. Home-Office Expenses
Some sole proprietors or independent contractors start with making their home their office space as well. If the home is the principal place of business, this can be a potential business deduction on their taxes.
Normally, the space of the home office must be surveyed. The expenses for the year will be multiplied by the percentage of space used. Expenses for mortgage or rent, utility bills, insurance, repairs and maintenance, and depreciation must be taken into consideration.
Some lawyers consider the “safe harbor method” where a fixed claim is made depending on a per square foot basis. This method does not allow depreciation claims.
2. Advertising, Entertainment, and Promotional Expenses
Marketing expenses such as flyers, tarpaulin ads, space rentals for ads, and online ads may be tax-deductible. Meals and entertainment may also be included for up to 50% only. As long as the expense for entertainment and meals can be proven for business purposes, then this can be an allowed claim.
3. Travel Expenses
If associate lawyers or partners are required to travel for business purposes, this may also be tax-deductible. For example, the transportation costs of traveling to a distant courthouse that lawyers would not normally go to can be claimed as business travel.
Also, if a lawyer travels for CLE credits, such as going to exotic locations around the world with Destination CLEs, these travel expenses might also qualify as a tax write-off. This makes the Eduvacations℠ of Destination CLEs a win-win, since you it allows you to earn your mandatory CLE credits while on vacation, while also being a potential tax deduction.
4. Books, Research Materials, and Periodicals
If an attorney keeps hard copies of legal research materials, this can be another potential tax deduction. To be more precise, the depreciated value of the hard copy law materials of a lawyer may be claimed.
5. Credit Card Convenience Fees
If a credit card is used for business purposes, this also fits within the claimable business expenses of a law firm.
There are multiple ways to cut down on expenses. This list only provides a basic overview of what can be treated as tax deductions. A consultation with a tax attorney or a CPA is still the best route.
In summary, CLE expenses can provide a tax break for some attorneys. The rules are complex, so it is important to speak with a tax professional to determine if these expenses qualify for a deduction.
In general, the IRS looks at two factors when determining if continuing legal education expenses are deductible:
1) whether the education maintains or improves skills required in your current profession and
2) whether the education is related to your law practice.
If both of these factors are met, then most likely your continuing legal education expenses will be considered a business expense and be tax-deductible. Plus, you may be eligible to write off your vacations in beautiful locations around the globe thanks to Destination CLEs. Click here to book your next Eduvacation℠ of Destination CLEs!