April 15th is a dreaded date for many. The federal and state tax codes are challenging for the best and brightest, not to mention for clients facing an audit or small business owners juggling new regulations regarding employee health programs and proper deductions. Lawyer Referral and Information Service (LRIS) Tax Panel attorney J.P. Harbour has been in practice since 2004. Recently he agreed to share some insight and answer questions about tax law.
Emmy Pasternak (EP): What are the common mistakes attorneys make when advising clients about payment of taxes on settlement proceeds?
J.P. Harbour (JPH): The main issue to be aware of is that amounts received from a lawsuit, award, judgment, or settlement almost always have tax consequences, especially lost wages, lost profits, and interest income, with the main exclusion being compensatory damages in connection with physical injury or physical sickness. The client should be informed of the tax consequences at the outset of representation. Steer clear of erroneous allocations between the amounts of excludable compensatory damages from taxable punitive damages that can have troublesome tax impacts. Other common mistakes stem from lack of verification of out of pocket expenses and court costs, as well as how the legal fees themselves are to be properly deducted on the client’s taxes.
EP: What are the common mistakes attorneys who have their own practices make? Is it difficult to balance maintaining the practice of law with the business of running a practice?
JPH: I run my own practice and I agree it can be difficult to maintain the balance of practicing law in a focused manner while simultaneously juggling bookkeeping, business development, staffing, volunteer commitments, and endless emails. The most common issues under examination when small law firms are audited focus on confirmation of the reported income and the verification of business deductions, as well as issues related to the mischaracterization and proper taxation of independent contractors and employees. In regard to business deductions in particular, items such as meals, entertainment, travel, donations, and home-office expenses are often scrutinized. Keep good business records and notes of the business reasons for such expenses.
EP: That sounds like a full time job before adding in representation of clients. Is it worth it to run your own practice?
JPH: Despite the extra work, it is really rewarding to have a top-down understanding and ability to manage all aspects of one’s business, and to not feel like a cog in the wheel of a large, impersonal machine. I run my practice so I can be nimble in making sure the business itself is designed to efficiently cater to the area of law I practice, my priorities, and the needs of current and potential clients.
EP: Has tax law always been of interest to you?
JPH: The most intriguing and valuable aspect of practicing tax law is that it is ultimately intertwined with so many other areas of law. It is important to unwind the tax consequences of various courses of legal action to fully understand which outcome would truly be the most advantageous for the client. Although I also practice in the areas of trusts and estates, probate, business, and real estate, tax law is my primary interest. Analyzing legal matters through a tax perspective benefits the client and attorney to identify the riskiest areas to pay close attention to or avoid. It helps to understand the whole legal “forest” as well as the trees.
On March 19, J.P. Harbour was an expert presenter at “Property Taxes & Personal Tax Deductions” a free workshop for the public presented by Homeownership SF and the San Francisco Housing Development Corporation.
Attorney J.P. Harbour joined the Tax Panel of the Lawyer Referral and Information Service in 2007. If you would like information about membership in BASF’s LRIS please contact Yvonne Ng, LRIS Membership Coordinator at yng@sfbar.org.
