Law firms overlook deduction for certain client costs.

• Author: Sharp, Holly
• Position: Brief Article

Amounts paid by an attorney or law firm on behalf of a client generally have to be capitalized and may not be deducted until the case is concluded. There are exceptions, however, and many amounts are being capitalized that could be expensed.

Letter Ruling (TAM) 9432002 provided that out-of-pocket expenses not charged to a client and not to be reimbursed may be deducted in the year it is determined not to bill the client. The letter ruling also provided that "soft costs," such as telephone, in-house photocopying, on-line research and work processing, may be expensed as incurred. Reimbursement of such amounts is taxed as income on receipt. This is distinguished from out-of-pocket expenses, such as court filing fees, which are client advances and must be capitalized.

The Boccardo case, 9th Cir., 1995, rev'g TC Memo 1993-224, addressed the issue of expenses of a law firm under a "gross fee" arrangement. The firm's contract with its clients provided for reimbursement of costs solely from recovery...