In this blog, we focus on the importance of how you manage your firm’s case costs and the tax advantages of case cost financing.

The Challenge of Managing Case Costs

How a firm manages its case costs could be a tax advantage or disadvantage.

For many contingency fee law firms, paying for case costs can be a challenging balancing act. From court filing fees and deposition transcripts to expert witness fees and medical resources, these expenses add up quickly.

Further complicating matters is the varied length of case timelines in a contingency law firm’s inventory – a factor that can cause irregular cash flow cycles. As a law firm takes on more cases, reinvesting revenue back into case costs can tie up cash and hamper its ambitions for growth.

Avoiding the Pitfalls of Phantom Income

According to Bryan Koshers, contingency fee accounting specialist and partner at Koshers & Company, firms that self-finance case disbursements can also run the risk of being exposed to phantom income and possible tax issues.

Phantom income occurs when a business owner pays taxes on income that has not been distributed to the business owner. Most often, the business uses this income to pay for operating costs. For trial lawyers, the income is often used to pay for case costs. For more information about avoiding phantom income, read our blog, “How Attorneys Can Avoid the Phantom Income Trap: 3 Key Considerations”.

Leveraging Case Cost Financing to Improve Cash Flow

Koshers notes that by utilizing case cost financing, firms can run the business while leveraging a credit facility to finance case disbursements. Having and maintaining your cash and credit reserves not only helps alleviate current and future cash flow concerns, but it can also provide a minimal-cost, high-benefit way of building up your practice.

In addition, the firm can deduct the interest expense or potentially pass it along as a case cost to the client if included in the retainer agreement and permitted by that state’s ethics opinion**.

Click above to watch this video featuring Ari Kornhaber, EVP & Head of Corporate Development, Esquire Bank, together with Seth Price, founding partner at Price Benowitz LLP, and Bryan Koshers, contingency fee accounting specialist at Koshers & Company, as they discuss “The Tax Advantages of Case Cost Financing”.

Meet with Esquire Bank

Now that you understand the tax advantages of financing case costs and how attorneys can avoid the phantom income trap, a good next step would be to contact an Esquire Bank relationship manager to discuss your law firm’s case inventory, growth trajectory, and capital needs.

Schedule a no-obligation consultation with an Esquire Bank Business Development Officer today at a time convenient to your schedule.

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For more on Esquire Bank’s expertise in providing tailored solutions for law firms, please visit Esquire Bank’s resources portal, Lawyer IQ, where you can learn about growing your business, financing for law firms, marketing strategy best practices, and more.

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*The information provided on (or accessed through) this email is provided for general informational purposes only and is not intended as, and should not be relied on for, law firm operations, tax, legal or accounting advice. Some of the information may not be applicable or appropriate for all law firms. Please consult your own tax, legal and accounting advisors as appropriate.

**As per the ethics opinion of the state you operate in.