4 Best Practices for Reimbursable Client Costs for Lawyers

Law firms often incur expenses on behalf of their clients, particularly when working on a contingency fee basis. These costs, known as reimbursable or advanced client costs, can impact the firm’s financial reporting and overall profitability.

Proper categorization and tracking are key to minimizing the risk of unrecoverable client expenses.

Which Client Expenses are Reimbursable?

Several client expenses are reimbursable, including but not limited to: 

Litigation-Related Costs

Direct litigation expenses, also known as hard costs, are reimbursable. These include:

• Court filing fees
• Mediation fees
• Travel expenses
• Court reporting fees
• Deposition expenses
• Expert witness fees
• Hearing transcript fees
• Medical record expenses

Hard costs may also include direct fees your firm pays to third parties during the course of litigation.

Typically, these costs are passed to the client as an upfront loan. They can’t be deducted, but they aren’t considered income either. Only if the client does not reimburse these fees can they be deducted as a loss.

Support or Soft Costs

Soft costs are support-related services that may require the help of someone working at the billing firm. 

These costs can include:

• Postage fees
• Faxing costs
• Clerical services
• Delivery services
• App costs
• Online research
• Legal research

Let’s say that your firm needs to send a fax for a client. Soft costs would include the labor of sending the fax and the cost of the paper, ink and maintenance of the fax machine.

Advanced Client Costs are Not Expenses

It’s tempting to treat reimbursable client costs as expenses. They are, after all, an expense. But categorizing these costs as expenses can have a negative impact on your firm’s finances.

Here’s how:

You Risk Being Non-Compliant 

The IRS considers advanced client costs to be client liabilities, not expenses. Reimbursed expenses are not considered taxable income, and non-reimbursed expenses can be written off as bad debt.

Improper classification can raise red flags during an audit. 

It May Lead to Poor Decisions

When you categorize reimbursable client costs as expenses, it distorts your profit and loss statement to show higher expenses than actually exist.

Essentially, it artificially deflates your net income and may make your firm appear less profitable than it truly is.

Stakeholders and partners may then make decisions based on this inaccurate data.  And while they’re not expenses, it’s also important to note that they aren’t revenue for your firm.

4 Best Practices for Reimbursable Client Costs

Understanding which client costs are reimbursable is only one piece of the puzzle. It’s equally important to follow the best practices for tracking and categorizing these costs.

Make sure that you:

1. Create a Separate Asset Account

As you know, many law firms make the mistake of treating advanced client costs as billable expenses. However, the correct approach is to categorize these costs as assets on your balance sheet because they are amounts owed by the client. 

Recording these costs as assets will ensure they reflect the expectation of reimbursement.

Setting up a separate, dedicated asset account will help keep your books clean and these expenses organized.

2. Mark These Costs as “Billable”

It’s good practice to record reimbursable expenses as an asset, but they should also be labeled as “billable” to the client. This ensures that the cost is properly tracked for reimbursement.

If your software allows, make sure that you also attach any documentation related to each expense, such as court invoices or receipts.

3. Reconcile Monthly

Monthly reconciliation is crucial to keep your books organized and clean. At the end of every month, review the Advanced Client Costs to ensure they agree with outstanding client balances. 

When reviewing these costs, be mindful of the statute of limitations on collecting unpaid client costs. Depending on where you’re located, you may have a limited window to recoup these expenses.

Any client costs that cannot be recouped should be labeled as bad debt.

4. Invoice Clients Regularly

It’s good practice to invoice clients regularly for advanced costs, especially for non-contingency cases. Ensure that you’re incorporating reimbursable costs into standard invoices and send them periodically. With this approach, clients aren’t hit with a big bill when the case wraps up, and your firm receives steady cash flow.

Break down costs and provide a detailed description when creating your invoices. 

Final Thoughts

Reimbursable client expenses can be complicated and cause issues if they’re not categorized properly. Following the best practices and working with an experienced bookkeeper can help you avoid the pitfalls associated with treating these costs as expenses.

To learn more about expense tracking or how we can help you with your accounting needs, schedule a consultation now!