IOLTA trust reconciliation, contingency fee revenue recognition, and entity structuring for solo practitioners and small law firms.
Law firms operate under a specific accounting rule that has no equivalent in most other industries: client funds held in trust must be tracked completely separately from firm operating funds, and mixing them is not just a bookkeeping error, it is a bar association compliance violation. Hasco Tax Advisors works with solo practitioners and small law firms on trust accounting, entity structure, and the specific revenue recognition issues that come with contingency and retainer-based billing.
Client retainers and settlement funds held in an Interest on Lawyers Trust Accounts (IOLTA) must be tracked separately from firm operating funds down to the individual client level. Commingling trust and operating funds, even accidentally, is a bar association ethics violation independent of any tax issue, and it is one of the most common triggers for a bar complaint. Books need to reconcile trust balances client by client, not just as one lump total.
Contingency fee income is not earned, and generally not taxable, until the case actually resolves and payment is received, but the costs a firm advances during the case (filing fees, expert witnesses, court reporters) need to be tracked correctly throughout, since how they are treated depends on whether they are structured as a loan to the client or a firm expense.
Most states require attorneys to practice through a Professional Corporation (PC) or Professional Limited Liability Company (PLLC) rather than a standard LLC. An S-Corp election layered on top of that structure, where state rules permit it, allows splitting income into reasonable salary and distributions, the same mechanism that drives S-Corp tax savings in other professional practices.
Fee splitting between attorneys on a referred case is common and generally permitted, but it needs to be documented and reported correctly, both for tax purposes and for compliance with state bar rules governing referral arrangements.
IOLTA balances reconciled down to the individual client level, not just a single trust account total, matching what bar compliance actually requires.
Costs advanced on contingency cases tracked separately from firm operating expenses, with clear records of what is reimbursable from settlement proceeds.
Retainers tracked correctly as they are earned against hours billed, not recognized as revenue the moment they are received.
For multi-attorney firms, partner draws, guaranteed payments, and profit allocations tracked and reconciled against the partnership agreement.
Join the individuals and business owners who trust Hasco Tax Advisors with their most important financial decisions. Your first consultation is completely free, and you will leave it with a clear, direct answer on what is needed and what it costs.