Article
Common tax challenges and practices impacting law firms
Jan. 25, 2023 · Authored by Jarrid McAuliff, Sarah Correia
Businesses in the professional services industry, including law firms, are no exception to the rule that it’s prudent to think ahead when it comes to taxes.
The following are common tax scenarios law firms may encounter, some examples of how they typically manifest, and some solution-oriented actions your firm could take to improve business.
Common Tax Challenges:
- Nexus and sourcing revenue for state income and tax purposes
- State and local sales and use tax imposed on purchases
Common Practices:
Nexus and sourcing revenue for state income and tax purposes
Allocating and apportioning state and local income taxes, including franchise and gross receipts taxes, can be complex. Compliance with state and local tax laws while considering sourcing provisions to help manage tax liability is important. This includes determining the jurisdictions in which your company has nexus and how it should source its revenue.
How does nexus affect law firms?
For a state to impose an income tax, franchise tax, or gross receipts tax on a company, the entity must have nexus in the taxing state.
Nexus is the connection between a taxing jurisdiction and a person or entity that causes that state to legally exercise tax jurisdiction over the person or entity. States may have differing nexus standards, which range from having a physical presence in a state — employees, office, inventory — to exceeding a bright-line sales or gross receipts threshold amount. This is also known as economic nexus.
An increasing number of states have adopted or are contemplating adopting economic nexus standards for income tax filing requirements. These nexus standards can range from a narrow bright-line sales factor threshold to a broader interpretation of gaining an economic benefit of doing business in the state, which can be interpreted as merely deriving receipts from sources within a state.
Related sections
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
