As a personal injury attorney, you may have heard about the power of deferring your contingency fee-based legal fees to future tax years. Many attorneys like the fact that deferring legal fees to future tax years can save them thousands of dollars on income taxes and helps them save for retirement.
One common question that we hear from attorneys is this: “If I defer a significant portion of my income, what happens in a year or two when I get into a big case, and I need a substantial amount of money to fund that case? What if I need cash to pay firm overhead in a lean year? Because I’ve deferred my fees, I don’t have access to those fees. What do I do in that situation?”
One of the reasons we like using deferred compensation plans for deferring legal fees is to address this specific concern. If you are in a situation where you need immediate access funds, the administrators of the deferred compensation plans that we work with will extend you a line of credit of up to 90% of the amount of your deferred fees.
You can use the funds from the line of credit for any reason. There is no limitation on the use of the funds. The rates on those loans range from 4% to 6%, which is much lower than most traditional law firm lenders.
So, if you’re worried about deferring legal fees because you think may need access to that money in the future, rest assured — if you need immediate funds, you can get a line of credit from the deferred compensation plan administrator. The line of credit funds are not taxable (since it’s a loan), and you can use the funds to generate more cases, fund firm overhead and case expenses, or however you see fit.
If you’re intrigued by the idea of deferring contingent legal fees to future tax years — but you’ve been worried about not being able to access your funds, don’t let that worry hold you back. We’re happy to discuss how these lines of credit work in practice and to explore if deferring legal fees makes sense for you and your practice.