Keeping finances up to date each month eases tax time
By AdvocateDaily.com Staff
With the deadline for filing personal income taxes fast approaching, it’s a good time for lawyers to think about the importance of keeping their firm’s financial house in order, Toronto legal management consultant Mark Dormer tells AdvocateDaily.com.
“I think it’s important as tax time comes around that, as professionals, we get our books and records up to date. It’s nice to tie things off and hand a nice package to your accountant," says Dormer, owner and president of Cosgrove Associates Inc.
"Of course, the best way to do that is to continually have up-to-date financial records. If you reconcile everything on a monthly basis, then your year-end tax time will go relatively smoothly.”
He notes that April 30 is the deadline to file personal income taxes when owners are paid through payroll, and June 15 when paid as professional earnings.
"For lawyers with professional income (partners and sole proprietors), their taxes are due by June 15," Dormer says.
"If there is any tax due, this amount is due by April 30. If they wait until June to file and pay any outstanding tax, they will accrue interest from April 30 to June 15. We try to have the financial information and filing ready, that way they know how much tax is due, and can pay the outstanding balance by April 30."
Law firms, especially smaller practices, can struggle to keep their financial records in order on a monthly basis, so for accountants finalizing the year-end, “it just takes more time to sift through the information, the costs go up and there could be delays,” Dormer says.
“Lawyers are so busy and focused on the practice of law that sometimes operating a business runs a distant second. So they have to find time every month for them or their support staff to make sure that everything’s reconciled and up to date.”
He recommends ensuring that billings are complete, accounts are collected and expenses are posted. “Keep up to date with filings, payroll remittances, HST and things like that. These things are easy to forget, but they catch up with you if you don’t do them,” Dormer says.
Businesses can run into trouble when they don’t take time to manage their cash and withdraw too much money on a regular basis, “not realizing that there’s not only a big tax bill coming up at the end of the year, but there could be HST remittances that they’re pulling out that should have been left behind,” he says.
“If you don’t have enough money to pay your tax bill, it’s important you start collecting your accounts as soon as possible to generate some cash for that.”
Dormer says it’s a good idea to set up a long-term plan with an accountant, who — in addition to analyzing financial statements and preparing tax returns — “can help you structure your business in the most tax-efficient manner.” An accountant can also provide sound advice on changes to such things as income sprinkling, which took effect on Jan. 1, 2018, the Financial Post reports.
“I think one of the most important things you can do to reduce tax is to prepare for next year’s tax now. You can do that by looking at the structure of your business, at putting a plan together and making sure that you set aside enough cash to pay the tax bill if you think there’s going to be one at the end of the coming year,” he says, adding that it’s “critical” for law firms to have “good accounting software.”
It’s also important to keep the personal separate from business, Dormer says. “Some smaller firms mix up their personal and business activities. Sometimes it’s a cash-flow thing, where it’s easier to cut a cheque from the business to pay for personal items. But it’s always best to keep your books clean. It makes it easier to audit the information.”
Failing to separate the two could also lead to a knock on the door from the Canada Revenue Agency, he adds.
Dormer advises lawyers to be aware of a proposal being considered by the federal government that would prevent professionals from using billed-based accounting. It allows them “to exclude the value of work in progress of the business at the end of a taxation year from business income for that year, and instead generally recognize the amounts in income only when the work is billed or billable,” according to a notice on the government’s website.