New personal injury lawyer here. tax question. I am dabbling with a few PI cases & wonder about whether to 1099 dr.s . Plz share
Also, another issue related. I have a settlement coming in probably end of this month or beginning of December. I may not get final liens and medi-cal liens until the beginning of next year. Am I going to have to pay taxes on the money since I can't disburse it in the same year in which I'll probably get 1099'd for receiving it? Please advise.
8 attorney answers
Advanced Client Costs
Attorneys commonly pay litigation expenses on behalf of their clients. The costs are then
recovered by the attorney out of the settlement or award. This practice is most often used
by attorneys who take cases on a contingency fee basis. These attorneys generally use a
cash basis of accounting and may deduct those expenses when paid, and the recovered
costs are included in income when received. This causes a distortion of income since it
can take years to resolve these cases.
Courts have determined that costs paid on behalf of a client are to be treated as in the
nature of loans for tax purposes. They are not deductible by the attorney as a current cost
of conducting business. The costs are those of the client and not the attorney since there
is an expectation of reimbursement. A bad debt deduction may be taken in the year that
any costs are determined to be uncollectible. Cases supporting this position appear in
The typical expenses included in this category are listed in Canelo v. Commissioner, 53
T.C. 217, 219 (1969), aff’d 447 F.2d 484 (9th Cir. 1971):
The types of costs advanced by petitioners' law firm include travel
expenses, costs of medical records, reports, interpreters' fees, witness fees,
deposition costs, filing fees, investigation costs, photographs, laboratory
tests, and sheriff's fees for service …. Petitioners ordered the services of
process servers, shorthand reporters, investigators, doctors, and expert
witnesses to whom litigation costs were paid.
The Tax Court explains in Herrick v. Commissioner, 63 T.C. 562, 569 (1975) (discussing
Burnett v. Commissioner, 356 F.2d 755 (5th Cir. 1966)) that:
In our view the clear inference of the Fifth Circuit’s opinion in the Burnett
case is that if the amounts deducted were advances by the attorney to his
clients whether for living expenses or other expenses normally paid by the
clients and there was an agreement or understanding that the attorney
would be repaid, the advances are in the nature of loans and were not
deductible business expenses.
Therefore, attorneys on the cash method of accounting may not take a current deduction
for client expense advancements for which an attorney expects to be reimbursed.
However, attorneys on the cash method of accounting are generally allowed a current
deduction for client reimbursed costs which are allocated to normal operating expenses,
(for example, secretarial costs or copying costs). These are general office type expenses
which would reasonably be incurred even if not charged to a particular client. Of course,
if a current deduction is taken, any subsequent reimbursement from the client would be
treated as income in the year of reimbursement under the tax benefit rule of IRC §111.
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There is typically a prearranged agreement with the client regarding the payment of caserelated
costs. Attorneys who advance client costs keep careful records of these expenses
to ensure that they are recovered out of the settlement. Generally, a ledger card or other
accounting record is maintained for each client detailing the expenses paid. When the
recovery is included on the cash receipts journal, it is usually shown separately from the
fee income associated with the case.
Attorneys taking cases on a contingency fee basis generally use two main contractual
arrangements. These two contractual arrangements are the gross fee contract and the net
The net fee contract specifically provides that advanced litigation costs are repaid to the
attorney before calculating the contingency fee percentage paid from the settlement or
In contrast, the gross fee contract provides that the contingency fee percentage paid from
the settlement or judgment proceeds is calculated without regard to advanced litigation
costs. The attorney is only entitled to a percentage of the settlement or judgment and is
not separately reimbursed for litigation costs advanced. These costs reduce the attor
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Webster's defined "Dabbling" as "to work or involve oneself superficially or intermittently especially in a secondary activity or interest."
My practice focuses almost exclusively on personal injury matters. I would not "dabble" in other areas of the law because I know that my clients would not be getting the best representation possible. I'm afraid that some lawyers feel that personal injury is a no-brainer, something that can be effectively executed in their spare time. Nothing could be farther from the truth. As with any area of the law, a complex body of law exists with countless nuances, statutes, decisions and other dynamics that affect the strategy and outcome of every individual case.
A client is entitled to representation not by someone who is dabbling in a particular area of the law but by someone whose level of experience will provide the client with competent, skilled and zealous representation.
I apologize if this sounds like a rant but I, for one, take the representation of injured clients very seriously and am offended by those who presume to dabble in this very complex area of the law and assume that a law license is all they need to effectively prosecute an injury matter.
I am not an accountant, but my taxman makes me send out the 1099 to medical providers.
With regards to the settlement. Again, not an accountant, but my understanding is that it is not income to your practice until you disburse.
One of the best things I've ever done in my practice is to join associations of attorneys in my practice areas. For example, the Massachusetts Academy of Trial Lawyers, The American Association of Justice, the National Association of Consumer Bankruptcy Attorneys, I also belong to a county bar association. Groups like this provide invaluable networking, occassional referrals, and more important a contact or two to call with questions.
I know you have regional and local groups over there on the "left coast".
Law Offices of Andrew D. Myers, North Andover, MA & Derry, NH provide answers for informational purposes only. Actual legal advice can only be given by an attorney licensed in your jurisdiction, thoroughly familiar with the area of the law in which your concern lies. This creates no attorney-client relationship.
I encourage communication and dialogue between personal injury attorneys. That being said, this is not the forum for you to be asking these questions. There are lawyer forums for lawyers to share their solutions for these issues. Regarding the taxes, Mr. Daymude's answer is spot on.
I have added the Practice Area: Income Tax. You only have to pay income tax on money you receive as income when it is received.
You cannot, however, delay receipt by refusing to transfer it from your trust account to your general account once your right to the income has become fixed.
Whether your right has become fixed would depend on your retainer agreement, any disbursal agreement, and whether you must wait to pay yourself before the other liens are satisfied.
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1099 any medical professionals. Don't mess with Uncle Sam.
Only 29% Contingency Fee! Phone: 215-510-6755 www.InjuryLawyerPhiladelphia.com
We 1099 any payments made to medical professionals. Not a tax whiz so can't answer your second question.
DISCLAIMER: David J. McCormick is licensed to practice law in the State of Wisconsin and this answer is being provided for informational purposes only because the laws of your jurisdiction may differ. This answer based on general legal principles and is not intended for the purpose of providing specific legal advice or opinions. Under no circumstances does this answer constitute the establishment of an attorney-client relationship.
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