Deductibility of reimbursable client costs.

• Author: Albert, Lawrence
• Position: Brief Article

Cash basis law and accounting firms often advance certain costs on behalf of their clients. These costs, reimbursable by the client, basically fall into two categories: out-of-pocket expenses and support service charges.

Out-of-pocket expenses are payments to outside vendors, such as charges for travel expenses, court recordings and filings, expert witnesses, delivery services and other direct fees paid on behalf of clients. Support service charges consist of charges for photocopying, word processing, tax return processing, etc. The client is billed a set fee for such services (i.e., so much per page, per hour, per return, etc.).

In recent Letter Ruling (TAM) 9432002, the IRS set forth the rules that cash basis law firms (equally applicable to accounting firms) should follow. (For a more detailed discussion of the TAM, see Tax Trends, "Deductibility of Law Firm's Out-of-Pocket Expenses Explained," 25 The Tax Adviser 715 (Nov. 1994).)

With respect to out-of-pocket reimbursable client expenses paid to third parties (even if collection is contingent on success of the case), such disbursements should be classified as "advances" or "loans." When payment is received from the client, it should be credited to the loan account; no income will result therefrom. In addition, these items are...