By Boris Musheyev, CPA
A profitable year should strengthen your financial position. Yet many attorneys finish December focused on collections, client matters, and staff bonuses without reviewing how much of their earnings will disappear into taxes. By the time their accountant prepares the return, opportunities requiring action during the year may already be gone. Year-end planning starts with a different question: What can we implement now to keep more of the income the firm has earned? For law firm owners, the answer may involve entity structure, state tax payments, retirement contributions, or real estate. These five strategies deserve attention before December 31, with the details coordinated around your firm’s ownership, cash flow, and existing tax arrangements.
1 Revisit the S Corporation Election
If your practice operates as a sole proprietorship or an eligible LLC taxed under the default rules, an S corporation election may reduce employment taxes. An owner working in an S corporation must receive reasonable compensation through payroll. Remaining business earnings generally are not subject to self-employment tax, although they remain subject to income tax.
That distinction can matter when firm profits substantially exceed a supportable salary. However, an attorney whose revenue primarily reflects personal services cannot simply choose a token salary and label everything else distributions. Compensation must reflect the actual work performed, responsibilities, and relevant market evidence.
Missing the regular election deadline does not necessarily eliminate this year’s opportunity. IRS late election relief under Revenue Procedure 2013-30 generally allows eligible applicants to request relief within three years and 75 days of the intended effective date. Requirements include an original intent to elect S status, reasonable cause, and consistent reporting where applicable.
There is no separate IRS penalty merely for requesting qualifying late election relief. That does not erase penalties for late payroll deposits or returns.
There is still time to evaluate eligibility and run appropriate payroll before year-end. Your advisor should also review earlier owner payments, payroll obligations, state treatment, and professional entity requirements. The objective is a defensible structure with measurable savings after compliance costs.
2 Complete Your PTET Payments
If your firm elected a state pass through entity tax, or PTET, confirm that the election has been followed by actual payments. Making the election alone does not secure the federal deduction.
PTET generally allows an eligible partnership or S corporation to pay qualifying state income taxes at the entity level. Those payments reduce income passing through to owners for federal purposes, outside the individual state and local tax deduction limitation. Owners generally receive a corresponding state benefit under their state’s rules.
For a calendar year, cash basis firm seeking the full 2026 deduction, pay the projected remaining 2026 PTET liability by December 31. Amounts paid next year generally produce next year’s deduction. Do not assume the state’s return filing deadline also controls federal deduction timing.
Have your advisor update projected income, subtract payments already made, and calculate the remaining amount. Follow any earlier state installment deadlines as well. Confirm payments are credited to the entity’s PTET account, and coordinate owner estimates and credits to avoid unnecessary duplicate payments. State eligibility, calculations, and payment procedures differ, so this requires a state specific review.
3 Maximize Retirement Contributions
Your retirement plan can help convert a profitable year into long term financial security while reducing current taxable income through eligible pretax contributions.
For 2026, the employee 401(k) deferral limit is $24,500. Participants age 50 or older generally can contribute another $8,000, bringing the total to $32,500. Those turning 60 through 63 during 2026 have a higher catch up allowance of $11,250, for a total of $35,750, when permitted by the plan.
Review contributions already withheld and adjust remaining payroll before the final paycheck. Employer contributions may provide additional capacity, subject to compensation, plan terms, and applicable limits.
For firms with fewer than 15 employees and net profit above $750,000, a cash balance plan deserves serious evaluation. Those figures are useful screening benchmarks, not legal eligibility requirements. A cash balance plan is a defined benefit pension that can complement a 401(k).
Depending on age, compensation, and plan design, an owner may be able to fund $200,000 or more annually. That amount is not a guaranteed minimum. An actuary must calculate allowable contributions, including required employee benefits. Evaluate ongoing funding commitments and administration costs before adopting the plan. Start the design now, even when applicable adoption or funding deadlines extend beyond December.
4 Examine the Building Your Firm Rents From You
Many attorneys own their office building separately from their law firm. This arrangement can create an opportunity to connect real estate deductions with practice income, but common ownership alone does not accomplish that result.
Suppose you own 100% of the law firm and 100% of the property it rents. Matching ownership can satisfy one condition for grouping the rental and operating business under the passive activity rules. The activities must also constitute an appropriate economic unit, and the grouping must comply with disclosure and consistency requirements.
With a valid grouping and material participation in the combined activity, an otherwise allowable rental loss may offset nonpassive law firm income. Without that treatment, the self rental rule generally makes net rental income nonpassive while leaving net rental losses passive.
A cost segregation study can identify building components eligible for shorter depreciation periods. Qualifying components may also receive bonus depreciation, potentially accelerating deductions substantially. Land is not depreciable, and the building itself does not automatically qualify for immediate expensing.
Before commissioning a study, review ownership, the lease, prior grouping treatment, acquisition dates, and depreciation history. Model the usable deduction after basis, at risk, and other loss limitations. A large depreciation figure only helps this year’s tax bill if the resulting deduction is currently available.
5 Consider a Short Term Rental Investment
A well selected short term rental can generate cash flow and depreciation deductions. For a busy attorney, its potential tax advantage comes from how the passive activity rules classify the operation.
When the average customer stay is seven days or less, the activity generally falls outside the rental activity definition for these rules. That can allow an owner who materially participates to use otherwise allowable losses against nonpassive income without qualifying as a real estate professional. Long term rentals generally face different requirements.
One material participation test requires more than 100 hours during the year and participation at least equal to that of every other individual. Exactly 100 hours is insufficient. A manager or cleaner who works more hours can prevent you from satisfying this particular test, although other tests may apply.
Keep reliable records of operational work and booking durations. Cost segregation and eligible bonus depreciation may accelerate deductions, but the property must be ready and available for rental by year-end to begin depreciation. Personal use and other loss limitations also require review.
Assess occupancy, financing, insurance, local rental restrictions, and management costs before purchasing. Tax deductions should support a sound investment. Consider future depreciation recapture when evaluating the overall return.
Put the Plan Into Motion
These decisions should be modeled together because one strategy can change the value of another. Payroll affects retirement contribution capacity, while retirement deductions can change projected state taxes. A coordinated projection helps you see the combined benefit and preserve sufficient cash for firm operations throughout.
Schedule a planning meeting while there is time to implement decisions. Bring updated financial statements, payroll records, retirement contributions, PTET payment confirmations, and property details. Ask your advisor to quantify available savings, assign responsibilities, and identify deadlines. The value comes from completing the right actions before opportunities expire.
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About the Author
Boris Musheyev, CPA
