As 2026 comes to a close, cash-basis law firms should consider year-end planning opportunities that may reduce or defer taxable income while supporting the firm’s broader business and cash-flow objectives.
Because cash-basis taxpayers generally recognize income when received and deductions when paid, actions taken before December 31 can directly affect the taxable income ultimately allocated to partners. Effective planning should consider not only the timing of receipts and expenditures, but also compensation, retirement benefits, state taxes and the partners’ individual tax implications.
Withum’s Law Firm Services team recommends that firms focus on the following areas as part of their year-end planning.
For cash-basis law firms, the timing of collections can have a significant impact on taxable income. Firms should review substantial outstanding receivables and anticipated December collections to develop an accurate projection of taxable income through year-end.
Where commercially appropriate, firms may consider the timing of year-end billing and collections. However, any strategy involving receipts should account for the constructive receipt rules, which may require income recognition when funds are made available even if the taxpayer has not physically received them.
Firms should also review retainers and amounts held in trust or IOLTA accounts to determine the appropriate tax treatment based on the underlying arrangement and the firm’s rights to those funds.
Once projected collections are understood, firms should identify expenditures they expect to incur and determine whether paying them before year-end could accelerate the corresponding tax deduction.
Potential expenses include:
Certain prepaid expenses may also qualify for current deduction under the 12-month rule. Large prepayments should be reviewed individually to confirm their tax treatment.
The objective is not to spend money simply to generate a deduction. Instead, firms should determine whether expenses already contemplated for early 2027 can appropriately be paid in 2026 when doing so provides a worthwhile tax benefit.
Year-end bonuses and other employee compensation may present additional planning opportunities. Cash-basis firms should evaluate whether compensation otherwise expected to be paid shortly after year-end can appropriately be paid before December 31.
Partner payments should be analyzed separately from employee compensation because different tax rules apply.
Firms should also review expected contributions to 401(k), profit-sharing, cash balance and defined benefit plans. Firms sponsoring cash balance or defined benefit plans should coordinate with their actuaries regarding contribution and deduction limits. It is important to confirm applicable plan-level deduction limits and, where relevant, consider the interaction between multiple qualified plans.
Firms anticipating investments in technology, equipment, furniture or other fixed assets should consider whether completing those purchases before year-end makes business and tax sense.
Depending upon the property involved, Section 179 and bonus depreciation may allow firms to accelerate deductions. Importantly, property generally must be placed in service, not merely ordered or paid for, to generate depreciation deductions for the year.
Implementation timing should therefore be considered when planning significant year-end technology or equipment purchases.
Pass-through entity tax (PTET) continues to warrant particular attention for law firms operating as partnerships or other pass-through entities, particularly as attorney mobility and multistate operations create increasingly complex state and local tax considerations. Rather than automatically following the prior-year approach, firms should reevaluate PTET elections and payments in each applicable jurisdiction in light of changes during the year.
This review should consider where the firm conducts business, whether operations expanded into new jurisdictions, state filing requirements, partner residency, the availability of nonresident credits and the potential tax benefits of making a PTET election.
Changes in partner residency, remote employees, office locations or other business activity may also affect nexus, apportionment, nonresident withholding, composite return requirements and the overall effectiveness of a firm’s PTET strategy. Accordingly, year-end planning should coordinate PTET decisions with the firm’s broader partnership tax and multijurisdictional filing obligations.
For cash-basis firms, the timing of PTET payments is also critical, as payments generally must be made by December 31 to support a current-year deduction at the firm level and maximize the related current-year federal tax benefit for partners.
In some cases, firm-level planning should be coordinated with the partners individual tax circumstances. Once the firm has reasonably projected taxable income, partners can evaluate complementary strategies such as:
Effective year-end planning starts with a reliable projection of the firm’s taxable income and expected cash activity through December 31. From there, firms can evaluate collections, expenditures, compensation, PTET payments, retirement contributions and partner-level strategies together rather than in isolation.
For cash-basis law firms, timing can be particularly important. Once the calendar year closes, many opportunities involving the receipt or payment of cash may no longer be available for 2026.
Withum’s Law Firm Services team can assist law firms and their partners with modeling projected taxable income, identifying year-end planning opportunities and coordinating federal, state and partner-level strategies.
For more information on this topic, please contact a member of our team.
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