expenses billed to client

[jgcpa]

Attorney bills client for expenses . Should  these reimbursements be reported in gross receipts in Sch C and then deducted in Cost of goods sold ( Other costs line 39 Part III)?  Or in gross receipts and in Part II expenses of Schedule C? Or not reported since they net to 0?

Thank you for your advice!

[TaxGuyBill]

If they are reimbursements under an Accountable Plan, they are not reported anywhere.

Otherwise, they are reported as gross income and then report the expense in the appropriate category (travel, office supplies, etc.).

[sjrcpa]

Research Client Costs Advanced.

[qbteachmt]

One significant issue is Timing. That's why Advanced Costs are held as an asset, to be reimbursed by the client, which washes them away. You don't include them as COGS or any type of Expense under these conditions, and the reimbursement is not Income (not gross or net). Think about the lawsuit that drags on over 3 or more years.

Your State Bar Association should be able to provide you with good attorney accounting references, to help you understand how operations are handled, client prepayment (retainers) are handled, IOLTA funds are handled, and case costs are handled.

If this is new to you, get some mentoring, too.

[jgcpa]

thank  you all. I found the Internal Revenue Manual for Attorneys which had my answer.

[qbteachmt]

It would be great if you post a link to that info; it helps the community, which is peers. Thanks.

[BobKamman]

Officially it's the "Audit Techniques Guide," not to be confused with the Internal Revenue Manual.

https://www.irs.gov/pub/irs-utl/attorneys_atg.pdf

Here's what I do, and why.  All deposits to the lawyer's bank account are reported as gross receipts, Line 1 of Schedule C.  This does not include payments to the attorney's trust account, which are generally refundable retainers.  When the money is transferred from the trust account as the work is billed, then it goes into gross receipts.  

Client costs (which include court filing fees, and sometimes other types of expenses, like expert witness fees, depending on what type of cases the lawyer handles) are deducted as other COGS.  This lowers the gross income on Line 7, and lowers the ratio of expenses to gross income.  Call me superstitious, but I believe the higher the gross income, and the higher the ratio of expenses to gross, the more likely an audit.

It's also important to have all the gross receipts on Line 1, even those that are client costs, because lawyers are 1099'd more than other professions (except maybe for those practicing medicine).  IRS will want to match total 1099's to Line 1.  Even if they don't do that, the first thing an auditor will do is match bank deposits to Line 1.  

[jgcpa]

https://www.irs.gov/pub/irs-utl/attorneys_atg.pdf

The audit technique guide is excellent on this subject!

[qbteachmt]

In a majority of firms, Client costs are held until case income occurs. You would not take them as COGS until then. Hold them as other asset until billing starts; then they move to COGS as income is recognized. Or, as pointed out, you wash them as reimbursed. Various methods apply because it depends on the type of practice, such as if the cases are settled on a Class Action or other general settlement basis (removed accrued other asset advanced costs to COGS at the point of settlement funding) such as an insurance case; if the firm is on routine retainer as Income (not prepayment); if this is a Job Shop (hourly work); public defense or criminal cases; etc. Or, for a divorce and family law practice, the advanced costs are reimbursed as part of the billing, which is broken out into advanced cost reimbursement, and then Fees and other charges as income.

The tax return expenses typically are operating expenses.