End of Year Preparations –

Best Practices for

Your Law Firm

Cindy Melfa

Affinity Consulting Group, LLC

Webinar

Wednesday, October 3, 2018

This page intentionally left blank.

Professional Competency Skills Webinar Series

Wednesday, September 5, 2018 12:00 pm - 1:00 pm Harnessing Technology and Avoiding Multitasking Errors Paul J. Unger, Affinity Consulting Group, LLC

Many lawyers feel the stress of time and the professional and ethical obligation they have to be responsive to the judicial system, their clients and other attorneys. Often adding to that stress is the relentless march of technology and the ongoing need to learn how to use software and hardware to help efficiently manage a legal practice. This one-hour webinar shows you how to make technology work for you rather than the other way around. We’ll discuss technologi-cal tools designed to make a lawyer’s life easier and strategies for learning how to use technol-ogy to assist you in the practice of law. We’ll also discuss the research regarding multitasking and how staying focused on one thing at a time can make lawyers far more efficient and avoid errors.

MCLE #161876. 1 CLE hour.

Wednesday, October 3, 2018 12:00 pm - 1:00 pm End of Year Preparations -- Best Practices for Your Law Firm Cindy Melfa, Affinity Consulting Group, LLC

Key to professional competency and a lawyer’s ethical responsibility to law firm management is the importance of taking care of end-of-year fiscal responsibilities – from monitoring your trust accounts to reviewing your budget and 1099 requirements to writing off aged accounts receivable and looking at your unbilled work in progress. This one-hour webinar offers a num-ber of best practice tips regarding early end-of-year preparation, including: reviewing your stale items on bank reconciliations, examining your unallocated payments and credit balances, look-ing at client costs advanced, and more!

MCLE #161878. 1 CLE hour.

Wednesday, November 7, 2018 12:00 pm - 1:00 pm Business Continuity - The New Frontier of Backup, Data Protection and Disaster Avoidance Barron Henley, Affinity Consulting Group, LLC

Catastrophic data loss can cripple your law firm and lead to malpractice claims, among other unpleasant things. You can’t afford to be without a plan for avoiding this. Learn how risk management, from creating backup rules to establishing responsibilities in your office, is necessary for ensuring professional responsibil-ity in serving your clients. Learn all the steps and technology you need to build a rock-solid system that will keep you up and running or per-mit a quick recovery from worst-case scenarios.

MCLE #161880. 1 CLE hour.

Wednesday, December 5, 2018 12:00 pm - 1:00 pm Billing and Accounting for Small Firms Cindy Melfa, Affinity Consulting Group, LLC

You may not even like to hear the word accounting, but efficient, accurate accounting is essential to the success of your practice and your professional responsibility as a lawyer. In this one-hour webinar we’ll explain your legal-specific accounting responsibilities, and why accounting software is important to your practice. Many lawyers either use software for billing only or use one program for billing and another for the rest of the accounting function, which do not share information. We will also discuss why it’s imperative that you use software for your entire accounting function and how to avoid using two programs when you only need one in order to ensure you bill your clients fairly.

MCLE #161882. 1 CLE hour.

Harnessing Technology and Avoiding

Multitasking ErrorsWed., September 5, 2018

12:00 pm - 1:00 pm

End of Year Preparations Best Practices for Your

Law FirmWed., October 3, 2018

12:00 pm - 1:00 pm

Business Continuity - The New Frontier of

Backup, Data Protection and Disaster AvoidanceWed., November 7, 2018

12:00 pm - 1:00 pm

Billing and Accounting for Small Firms

Wed., December 5, 201812:00 pm - 1:00 pm

PDF Power HourWed., January 2, 2019

12:00 pm - 1:00 pm

www.nebar.com

Wednesday, January 2, 2019 12:00 pm - 1:00 pm PDF Power Hour John Federico, Affinity Consulting Group, LLC

You have probably noticed that PDF files are everywhere. They have become the file format of choice when trading documents with other lawyers and clients. Many courts now require that all pleadings be filed as PDFs and most governmental forms are available exclusively in PDF format. Because of their prevalence, everyone in your office needs to understand the risks and benefits of PDF files. In this one-hour webinar, you’ll learn appropriate uses of PDFs, and we’ll cover extremely important topics such as metadata removal and electronic document security, redaction, Bates Numbering, splitting/combining PDFs, reducing file-size for electronic case filing, review/comment and PDF collabora-tion, adding signatures and stamps, routing PDFs for comments/feedback, and more.

MCLE #161884. 1 CLE hour.

About Affinity Consulting Group, LLO

Affinity Consulting Group was founded by a group of legal IT and management consultants with a collective 135 years of legal experience and specializes in strategic technology and management solutions for law firms and legal departments of all sizes. Uniquely positioned via decades of experience as attorneys, law firm admin-istrators, paralegals, law firm trainers, and legal IT, Affinity con-sultants have been working with law firm clients since 1998 on technology audits; strategic business & management assessments; technology selection and implementations; traditional and cloud-based financial practice management; litigation support and trial preparedness; and in-house training and professional development.

Affinity consultants are the most experienced in outfitting law firms and legal departments with solutions tailored to their specific needs—saving their clients time and money and giving them their lives back.

Faculty Bio Cindy Melfa Affinity Consulting Group, LLC

Cindy A. Melfa is the managing partner of Affinity Consulting Group’s Naples, FL office. Prior to joining Affinity, she was the founder and president of Legal-Tech Solutions, Inc. Cindy is a certified law office software consultant with over 24 years’ experience in law firm accounting, financial workflow and management, practice management, and document management. With an educational background in management and marketing, and prior employment as a law firm real estate closer and firm administrator, she consults with law firms throughout the United States and Caribbean on law office software as well as sophisticated practice management issues.

Cindy is a graduate of Florida International University (B.A.), and a certified consultant/trainer. Besides actively consulting on law office productivity and management issues, Cindy has served on the LexisNexis Certified Consultants panel, the PCLaw Product Advisory Board, and Amicus Attorney President’s Club, in addition to conducting webinars for LexisNexis.

This page intentionally left blank.

SMART BUSINESS STRATEGIES FOR THE LEGAL WORLD.

EXPERIENCED. CREATIVE. CONNECTED.

End of Year Preparations - Best Practices for Your Law Firm

Presented By: Cindy Melfa

cmelfa@affinityconsulting.com

It’s only October!

What you say to yourself…

I have plenty of time!

What you say to yourself…

A lot will change between

now and then

What you say to yourself…

Surprise!

Fourth quarter is prime planning time!

Review, correct, plan

Don’t wait until January to start

Too late for some tax planning items

Avoid Stress!

Firm’s financials should be reviewed and

analyzed all year long

Monthly checklist of items & reports

Confirm things are done properly each

month - easier to find, correct, improve

process

Waiting until year end to find issues will

take more time/frustration

Maintain…

Can CPA review 3rd quarter books for tax planning & get accurate figures?

Don’t wait until year end to confirm all items being done timely:

Payments posted

Bills finalized

Trust transactions entered

AP entered/paid

Payroll posted and liabilities paid

Bank reconciliations (check stales)

Is Data Entry Up to Date?

You CANNOT use your trust account as a

tax planning tool (i.e. Defer income to 2019

by leaving earned fees in trust)

IRS Attorney Audit Technique Guide

highlights this – it WILL be an audit issue if

caught

Trust Account ≠ Tax Planning

If your timekeepers have goals for the year,

make sure their progress has been

communicated to them.

Give them regular actual v. target reports or

dashboards

Let Timekeepers Know…

Can’t fix something

they don’t realize is

broken.

WHAT YOU MUST DO

Confirm they are up to date

Review, void and re-issue stale dated

checks 6 months and older

You should never have uncleared

deposits that are more than a few days

old

Bank Reconciliation

Review list of vendors now and send W-9s as

needed.

Review the requirements (basically anyone who is

not a corporation should get a W-9)

LLCs require 1099s unless filing as a corporation

Consider online filing services (file4biz.com or

Google 1099 online filing)

1/31/2019 deadline

Can your accounting program

produce them?

1099 Prep

If you are not using a payroll service, you

will need to acquire and prepare the

forms

1/31/2019 deadline

Online services available to help (e.g.

file4biz.com, www.w2-form-online.com/)

W-2s and W-3 Payroll Forms

Check for miscoding. For example:

Fixed assets posted as expenses, or

vice versa (e.g. Computers, Furniture)

Payroll tax or benefit liability account

balances

Inflated Misc./General Office or

Suspense accounts

Line of Credit balances

Adjusting journal entries

Review Financial Statements

WHAT YOU SHOULD DO

Review all A/R and WIP

over 90 days.

If truly uncollectible,

then write it off/down. If

WIP, can you get it

billed out, apply

retainers, etc.?

Review Aged A/R & WIP

This is particularly true of Client Costs Advanced

because you can expense these only if written off,

otherwise declared as an asset and taxable at year

end

Firms are supposed to file taxes as modified cash

(AR/WIP Client Advance balances tracked as an

Asset, not an Expense per IRS Attorney Audit

Technique Guide, Chapter 3).

Aged A/R & WIP

IRS Guidelines on Client Costs Advanced

Review and balance your Unallocated Payments/Credit Balances and confirm all ledgers correct

Does your GL account holding these funds balance to the amount on individual client ledgers?

Should any of this money be refunded or moved to trust?

Unallocated Payments/Credits

Review and Balance your client costs

advanced to make sure that the amount in

the asset account is not overinflated.

Depending on your software, there will be

different ways to do this, or there may be a

report that automatically tells you if they

are in balance or not.

Client Costs Advanced

You may wish to check the YTD fee and cost

allocations from your receipt/payment reports and

confirm that the GL account totals YTD match

Check YTD allocations

Review age of trust balances and confirm

no amounts due to be returned to client, or

alternatively send to unclaimed property

department of the State.

Keep on top of this regularly.

Trust Balances

Actual to Budget situation as of 3rd quarter:

How are you doing? Did you blow it or did you

come in pretty close? Foreseeable deviations or

unforeseen?

Do you need to adjust next year for some of the

items that caused deviation?

What big expenditures are expected next year

(e.g. new computers, other fixed assets, opening

of new office location, adding attorneys or staff,

etc.)

What items will be reduced?

Budgeting

If net income is higher than expected, should the

firm look for logical expenditures to make in this

fiscal year to reduce taxes? E.g. new software,

equipment, etc.

Most firms want to expense everything they can

before year end, particularly if they have had a

good year, to reduce their taxes, so make sure

all items that can be expensed in the fiscal year

are posted.

Net Income – Tax Planning

If your firm files as an S Corp, be careful how

much your partners show in distributions versus

salary.

IRS will scrutinize this and if “reasonable”

salaries are not being taken, they may assume

you are trying to avoid FICA taxes.

Should an Auto/Vehicle allowance be on W-2?

Personal travel & entertainment expensed to firm

IRS Scrutiny

Once all year end items are complete and you

have sent your financial statements to your CPA,

lock down the financials.

No further changes to the fiscal year except for

AJEs provided by your CPA.

Also best practice to make a backup that is kept

(not overwritten) of these figures.

Lock Down!

Once the CPA has finalized all items for tax,

he/she should give you adjusting journal entries

for things like depreciation, any issues found and

corrected and allocation of income to

shareholders (depending on the entity type).

Partnerships will disburse to equity accounts

while corporations may carry forward retained

earnings.

Final AJEs

Name: Cindy Melfa | Email: cmelfa@affinityconsulting.com | 877-676-5492

@cindymelfa

@affinitylegal

Cindy's LinkedIn

Like ACG!

Affinity Consulting Group www.affinityconsulting.com

877-676-5492 {A0267662-1 }

Year End Checklist

At year-end, there are many financial items that firms should do to prepare for taxes, and then there are things they SHOULD be doing as a matter of best practice. Many of those things start well before the year ends and should be considered in the fourth quarter to allow for proper planning. Below is a list of items to help guide you on these issues.

Fourth Quarter Planning

Review Current Year Budgets: Theoretically you should be looking at your actual to budget all year long to see where you are deviating and why. But this is particularly relevant to do as you enter 4th quarter. How are you doing for the year? Do you need to adjust for some of the items that caused deviation next year?

Begin Drafting Next Year’s Budget: Begin drafting budget for next year. If you are aware of any items that will deviate significantly from this year, be sure to account for those (e.g. hiring/expanding, replacing equipment, etc.)

Review Net Income/Tax Planning: If net income is higher than expected, should the firm look for logical expenditures to make in this fiscal year to reduce taxes? Most firms want to expense everything they can before year end, particularly if they have had a good year, to reduce their taxes, so make sure all items that can be expensed in the fiscal year are posted. Discuss with the firm’s CPA recommendations he/she may have to minimize taxes.

Prepare for 1099s: Review your list of vendors for operating and trust and send W-9s as needed. Review the requirements (basically anyone who is not an INC should get a W-9). LLCs require 1099s unless filing as a corporation (if filing as partnership they are required to get them), so best to send W-9s to them too if uncertain. When in doubt, put the onus back on the vendor by sending them a W-9, or ask your CPA about the rules.

Year End Checklist Page 2

4837-6386-6182, v. 1

Review Aged WIP: Take the time to review with your attorneys the firm’s Aged Work in Process by responsible attorney. If there are files that can be billed, get those processed. If there are files that should be written off and closed, identify and handle those as well.

Review Aged A/R: Again, take the time to review with each responsible attorney the Aged Accounts Receivable and determine what is truly uncollectible and write those balances off. Determine if stronger collection efforts need to be made on others, etc. It is particularly important to determine if there are any costs advanced that can be written off as these are a taxable asset according to the IRS Attorney Audit Technique Guide. Writing these off allows you to expense them for tax purposes.

Review Your Stale Items on Bank Reconciliations You should never have uncleared deposits that are more than a few days old. Checks should not be stale more than 6 months typically and you should be contacting vendors who haven’t cashed checks within a few months to make sure these don’t cause headaches for you. Banks should not cash a check presented that is older than 1 year. In the case of client costs requested by employees, confirm with your employees that the checks were mailed and aren’t sitting in a closed file somewhere.

Review and Balance Your Unallocated Payments/Credit Balances Confirm everything that should have been allocated/applied is. Should any of this money be refunded or moved to trust? Clean up to only have what is necessary in there.

Review and Balance Your Client Costs Advanced Make sure that the amount in the asset account is not overinflated. Depending on your software, there will be different ways to do this, or there may be a report that automatically tells you if they are in balance or not. If you are out of balance, better to address it as much as possible monthly or quarterly rather than waiting for year end.

Review Aged Trust Balances

Year End Checklist Page 3

4837-6386-6182, v. 1

Review age of trust balances and confirm no amounts are due to be returned to client, or alternatively sent to unclaimed property department of the state. Keep on top of this regularly. Having to submit to state is a headache so much easier if you can locate client and return. You should also confirm that none of the balances in trust are earned and payable to the firm. The IRS frowns heavily upon using your trust account as a tax planning tool and delaying taxable income to the new year. If you have earned monies in the accounts, they should be applied and transferred.

Year-End

Complete all data entry for the year (make sure all payments are posted, bills are finalized, trust transactions entered, AP entered/paid, payroll posted, etc.)

Reconcile all final bank statements and address stale items that you haven’t addressed in prep for year end. Confirm three-way reconciliation for trust accounts.

Review financial statements for accounts that appear incorrect. Things to look for:

• Payroll accounts – are there any liability accounts that show incorrect year end amounts?

o May want to reconcile YTD payroll figures for salaries, tax expense accounts, liability accounts, retirement accounts, other benefit accounts such as health, dental, etc.

o Make sure no discrepancies that need adjustment before W-2s are issues to employees. E.g. if partners receive payroll and thus W-2s are there additions to be put on W-2s for health insurance premiums and other taxable benefits?

Review Miscellaneous and Other Office Expense accounts that are nebulous. Those can be red flag accounts to the IRS – are there things that should be reclassified in there?

Review fixed asset and related expense accounts and determine if any assets have been coded as expenses and vice versa. CPA should be able to give the firm guidelines as to what should be booked as a fixed asset versus and expense. Some CPAs seem to do it by dollar value, but the IRS indicates it should be done by amount of time it will likely be kept. E.g. currently, you can easily buy an $800 iPhone and replace it in 2 years.

Make any adjusting journal entries required based upon misclassifications, etc.

Year End Checklist Page 4

4837-6386-6182, v. 1

Review 1099 list for accuracy and any final adjustments. Issue 1099s or give accurate list to accounting firm to issue.

Do final year end balancing of client costs advanced and unallocated payments. Be mindful of capturing reports for 12/31 that preserve what AR and WIP were as of that date for client costs advanced after all data entry has been done.

You may wish to check the YTD fee and cost allocations from your receipt/payment reports and confirm that the GL matches that. *Note: if there have been prior period adjustments or other manual adjustments, these figures may have good reason for not matching.

Once all year end items are complete, you should send your financial statements to your CPA. Once you do that, the fiscal year should be LOCKED and no further changes allowed, except for AJEs provided by your CPA. It is also a best practice to make a backup that is kept (not overwritten) of these figures.

Once the CPA has finalized all items for tax, he/she should give you adjusting journal entries for things like depreciation, any issues found and corrected and allocation of income to shareholders (depending on the entity type). Partnerships will disburse to equity accounts while corporations may carry forward retained earnings.