What are the best tax strategies for North Carolina law firms in 2025?

North Carolina law firms can reduce taxes by optimizing their entity structure (S corp or partnership), tracking partner draws properly, contributing to Solo 401(k)s or defined benefit plans, treating client costs correctly, leveraging NC-specific deductions, and maintaining audit-ready books. Polaris Tax & Accounting provides tailored strategies for law firms across Charlotte, Lake Norman, and Asheville.

As a law firm, your expertise is in advocacy, contracts, and litigation. But when it comes to taxes, even the sharpest legal minds can miss out on major opportunities.

Polaris Tax & Accounting works with law firms across North Carolina—including Charlotte, Lake Norman, and Asheville—to structure their finances in a way that not only ensures compliance but actively reduces tax exposure. Here are the updated best practices and tax-saving strategies your firm should know in 2025.

1. Entity Optimization: The Foundation of Tax Efficiency

Your entity structure affects everything from self-employment tax to retirement contributions. Most law firms are either partnerships or S corporations. But the right choice depends on:

  • Number of partners or owners
  • Level of net income
  • Growth and compensation goals

S Corporations can help reduce self-employment taxes when managed correctly. But don’t fall into the trap of “set it and forget it.” The IRS is increasing scrutiny around reasonable compensation. Your salary must be supportable by market data, and you must maintain accurate payroll records.

✉ Tip: We recommend a formal compensation analysis at least once every 2 years—especially if your firm has grown.

2. Track Partner Draws & Distributions Separately

Many law firms blur the line between owner draws and expense reimbursements. This creates messy books and increases the risk of IRS scrutiny.

Best Practice:

  • Reimburse legitimate business expenses through accountable plans.
  • Track all draws separately from W-2 wages.

Solid books mean solid defense in an audit.

📄 See how our bookkeeping services protect your tax position

3. Leverage Retirement Accounts the Right Way

Law firm owners often miss out on some of the most powerful retirement planning tools.

If you are a solo attorney or small firm:

  • Solo 401(k) plans can help you defer up to $69,000 in 2025 with catch-up.
  • Defined benefit plans may work for high-income firms with stable cash flow.

These reduce current-year taxable income and build long-term wealth.

4. Deduct Client Costs the Right Way

Advance client costs must be treated correctly. Under IRS rules:

  • Contingency fee firms often capitalize client costs.
  • Firms using accrual method may deduct when incurred.

A misclassification could trigger large audit adjustments.

5. Don’t Miss North Carolina-Specific Credits & Deductions

North Carolina offers various deductions and incentives for:

  • Research and innovation (if your firm is investing in legal tech)
  • Hurricane disaster relief
  • Contributions to NC 529 accounts (great for partners with college-age children)

6. The Most Common Mistakes We Fix

  • Mixing personal and business expenses
  • Not reconciling IOLTA accounts properly
  • Misreporting guaranteed payments
  • Delaying S corp elections (or not filing Form 2553 correctly)

If your books are a mess or your last accountant just “filed what you gave them,” we can help.

📃 Explore our IRS Help Services for NC Firms

Final Word: Proactive Planning Beats Reactive Filing

Tax prep is what most firms settle for. But tax strategy is what separates the smart firms from the ones constantly surprised by what they owe.

Whether you’re a solo attorney or a multi-partner practice, we can help you:

  • Clarify your income structure
  • Reduce your audit risk
  • Keep more of what you earn

📅 Schedule a consultation and let’s build your 2025 tax strategy right.