5 Tax Planning Steps Every Law Firm Should Take in 2026

The first quarter of a new year presents law firms with a critical window. Decisions made now about accounting systems, entity structures, and tax strategies will ripple through the next twelve months of profitability. Yet many firms treat January as simply another billing cycle, missing the opportunity to position themselves for meaningful tax savings and operational clarity.

The firms that consistently outperform their peers financially share a common trait: they treat the start of each year as a strategic reset. From last year, they review what worked, identify what didn't, and make deliberate adjustments before the year's momentum makes changes difficult.

Here are five steps your law firm should take now to set 2026 on the right trajectory.

Step 1: Audit Your Trust Accounting Compliance

Trust accounting remains the area where law firms face the greatest compliance risk and the most severe consequences for errors. State bar associations continue to increase scrutiny of client funds management, and the penalties for commingling or mishandling trust funds can end careers.

Start 2026 with a complete reconciliation of all trust accounts. This means:

• Matching every client ledger to bank statements

• Identifying any discrepancies between records

• Documenting the resolution of each variance

If your firm hasn't performed a three-way reconciliation (comparing the client ledger, trust account ledger, and bank statement) recently, this should be your first priority.

Beyond reconciliation, evaluate whether your current trust accounting procedures meet your state's requirements. Rules vary significantly by jurisdiction, and what worked in 2025 may need adjustment if you've expanded into new practice areas or begun serving clients in additional states. Many firms discover gaps only when facing an audit, which is the worst possible time to learn your procedures are inadequate.

If your internal processes aren't producing clean, auditable trust accounting records, consider whether specialized law firm accounting services might provide the expertise and systems your firm may lack internally. The cost of professional trust accounting support is minimal compared to the cost of a bar complaint.

Step 2: Evaluate Your Entity Structure and Tax Elections

The entity structure that made sense when your firm launched may no longer be optimal. Tax law changes, firm growth, partner additions or departures, and shifts in profitability all affect whether your current structure minimizes tax liability.

Most law firms operate as partnerships, S-Corporations (S-Corp), or sole proprietorships. Each structure carries different tax implications, and the differences can amount to tens of thousands of dollars annually.

For example, S-Corp election allows owner-employees to split income between salary (subject to self-employment tax) and distributions (not subject to self-employment tax). But this election only makes sense when the firm's profits exceed certain thresholds and when the administrative requirements are manageable.

The beginning of the year is the ideal time to evaluate structural changes because most elections must be made early in the tax year to apply. If you're considering converting from a partnership to an S-Corp, or if you're wondering whether your current election still serves you, now is the time to consult with a law firm CPA who understands the specific implications for legal practices.

This evaluation should also include a review of how partner compensation is structured. Guaranteed payments, profit allocations, payroll and draws all carry different tax consequences. Firms that optimize these arrangements can often reduce overall tax burden without changing the actual economics of partner compensation.

Step 3: Clean Up Your Books and Establish Monthly Disciplines

Accurate law firm bookkeeping is the foundation of every other tax and accounting strategy. Without clean books, you cannot make informed decisions about distributions, estimated taxes, retirement contributions, or any of the planning opportunities available to your firm.

If your 2025 books are not fully reconciled and categorized, make that your immediate priority. Every transaction should be properly coded, every account should be reconciled through December 31, and your financial statements should accurately reflect the firm's position. Attempting to do tax planning on top of unreliable numbers is like navigating with a broken compass.

Once your historical books are clean, establish the monthly disciplines that will keep them accurate throughout 2026. This means setting specific dates each month for:

• Completing bank reconciliations

• Reviewing credit card statements

• Documenting any inter-account transfers

The firms with the cleanest books typically follow a simple rule: no transaction should remain uncategorized for more than 30 days. When you maintain this discipline, year-end becomes a straightforward process rather than an archaeological expedition through twelve months of neglected records.

January is also the right time to review your chart of accounts in whatever accounting software your firm uses:

• Are you tracking the categories that actually matter for decision-making?

• Have any accounts become obsolete or redundant?

A clean chart of accounts makes both monthly bookkeeping and financial reporting significantly more efficient.

Step 4: Review Retirement Plan Contributions and Structure

Retirement plans offer law firms one of the most powerful tax reduction tools available, yet many firms either underutilize their existing plans or haven't explored options beyond basic SEP-IRAs.

The anticipated contribution limits for 2026 should inform your planning now. For solo 401(k) plans, contribution limits typically adjust annually for inflation, and when combined with employer profit-sharing contributions, total contributions can reach substantial levels for high-earning attorneys. If your firm hasn't maximized these opportunities, you're likely paying more in taxes than necessary.

Beyond contribution amounts, evaluate whether your current plan structure serves your firm's goals. Different plan types offer different advantages:

• SEP-IRAs are simple but inflexible

• SIMPLE IRAs work well for firms with employees

• Solo 401(k) plans offer the highest contribution limits for owner-only firms

• Defined benefit plans can shelter even larger amounts for established attorneys with consistent high income

The analysis becomes more complex for firms with non-owner employees because contribution requirements and testing rules affect what owners can contribute for themselves. A legal accountant with experience in professional service firms can model different scenarios to identify which structure provides the best combination of tax savings, administrative simplicity, and flexibility.

If you're planning to add or change retirement plans, the earlier in the year you act, the more options remain available. Some plan types have establishment deadlines that, once passed, limit your choices for the current tax year.

Step 5: Create a Quarterly Tax Planning Calendar

Tax planning is not a December scramble. By the time you're filing in April, the majority of your tax-saving opportunities for the previous year have already passed. The firms that minimize their tax burden make strategic moves throughout the year, not in a last-minute rush.

Most CPAs only talk to their clients once a year at tax time. By then, it's too late to do anything about the numbers you're looking at. The better approach is quarterly planning that uses current data to make informed decisions about what comes next.

Here's what quarterly planning actually delivers:

• Cash flow insights: Analyzing incoming revenue, upcoming expenses, and partner distribution capacity. You'll know whether you can afford that new associate, office expansion, or marketing investment before you commit.

• Compliance monitoring: Trust accounting doesn't fix itself. Quarterly reviews catch IOLTA reconciliation issues before they become State Bar problems and keep your firm audit-ready year-round.

• Tax planning checkpoints: Identifying quarterly estimated payment opportunities, evaluating equipment purchases for depreciation timing, and adjusting your approach based on how the year is actually unfolding.

The best business decisions are made with current financial intelligence, not six-month-old data. Hiring decisions, marketing spend, partner compensation, practice area expansion - these don't wait for tax season.

The firms we work with know their projected tax liability before year-end. They make equipment purchase decisions in November while there's still time to capture bonus depreciation. They evaluate pass-through entity tax elections before state deadlines pass. They adjust estimated payments quarterly instead of overpaying early or facing penalties later.

Without proactive planning, you're paying whatever the math says you owe. With it, you're implementing strategies that minimize that number while there's still time to act.

Making These Steps Work for Your Firm

Understanding what should be done and actually implementing it are different challenges. Most managing partners know their books should be cleaner and their tax planning should be more proactive. The gap exists not from lack of knowledge but from lack of time and specialized expertise.

The firms that execute these steps successfully share common characteristics: they maintain disciplined legal accounting practices throughout the year rather than scrambling at year-end, they work with advisors who understand the specific challenges of law firm accounting, and they treat tax planning as an investment rather than an expense.

Each of the five steps outlined above builds on the others. Clean trust accounting feeds into accurate bookkeeping. Accurate bookkeeping enables meaningful entity structure analysis. Sound structure supports optimized retirement planning. And all of it comes together in a quarterly planning rhythm that captures opportunities as they arise rather than discovering them too late.

At Counsel CPAs, we work exclusively with law firms, bringing a deep understanding of how these strategies apply to your specific structure and situation.

Contact us today to start 2026 with the accounting foundation and tax strategy your law firm deserves.