Attorney services in accounting
Many companies and entrepreneurs need legal support or advice. Especially if there is no internal legal department, then it is necessary that the terms of contracts and agreements are reviewed by a third-party specialist. If the business gets involved in litigation, attorney services may be required even with having full-time lawyers. In any case, the company or individual entrepreneur pays for the assistance of a third-party specialist, and attorney services in accounting are reflected in a certain way.
The first condition: in order to take the attorney assistance into account in expenses, you need supporting documents proving the fact that the services were provided and that the company needed them. As a rule, an agreement is signed between an attorney and a client, which can be an individual and a company, and this document is required, otherwise the regulatory authorities may have enquiries. Attorney assistance that were provided without a contract cannot be recorded as expenses.
Contract is considered concluded when the parties agree on all essential conditions for the provision of assistance. However, there are some set of conditions and situations where this document may be invalidated. To prevent this, the contract must contain the following conditions:
• information about the parties;
• document proving attorney’s right to practice law;
• subject of assistance and cost;
• cost recovery procedures and liability.
In order for the attorney services to be recorded correctly in accounting, after the execution of the contract, the parties shall sign an act confirming the acceptance of the assistance provided. An act is a form of primary accounting, on the basis of which expenses are taken into account. The unified form of this document is not provided, therefore, it is in free-form statement.
Accounting of attorney services: inclusion in expenses
If legal assistance is not part of the organization’s main business activity, attorney support can be reflected in accounting as part of other expenses. But not everything is as simple as it seems. The company is entitled to take costs into account in calculation of income tax if they match the following requirement:
• economic feasibility and justifiability;
• documentary evidence of assistance received;
• focus on generating income.
In order for the company’s costs to be justified, the valuation must be expressed in cash. The documented expenses are ones which drawn up by documents in accordance with the requirements of the law. It is important that they are drawn up in accordance with the Russian laws or business customs that are accepted in a foreign country (if the contract was concluded abroad).
From the accounting point of view expenses are aimed at financing commercial activities of an enterprise. In other words, attorney services shall be reported in accounting showing an obvious relation between attorney assistance and the company’s income.
Justification of costs is determined on the basis of a number of circumstances. For example, the outcome of the dispute is usually taken into account, the formed prices for attorney assistance in a particular region, and the terms of reference of a representative in court.
The main conditions for cost accounting include the following requirements:
• Amounts should be accounted for at the value specified in the contract.
• The price is taken for accounting after receiving the services, which must be evidenced by a free-form act.
• Reflection of the cost of attorney assistance as part of other expenses is made for the period of its actual implementation.
• For accounting, it is important to demonstrate that the attorney assistance was provided directly to the company, and not to its individual representatives. The costs of attorney advices for officials, including directors, cannot be taken into account if these consultations did not directly concern the operation of the enterprise. The costs of considering administrative claims against managers and senior employees are not paid from the company’s budget but shall be paid by the employees.
For tax purposes, the costs of legal assistance are part of non-operating expenses. They are taken into account when determining the tax base for income tax and single tax payable under the simplified tax system (“income minus expenses”).
Accounting and tax accounting of attorney services
In order to avoid questions from the state authorities during inspection, the cost of legal assistance must be confirmed by the contract and the details of the services. The streamlined wording in the records will inevitably cause dissatisfaction of the inspectors, since it is impossible to understand exactly what support the lawyer has provided. In addition, if the costs are compensated by the defendant in a court of law, the amount must meet the requirement of reasonableness and comparability with the market value of similar services.
In addition, legal assistance may be required even with a full-time lawyer. In such a situation, it is necessary to prove that the help of a third-party specialist is really necessary. The functions of a full-time employee should not coincide with the support that you receive from external lawyer. It is important to clearly define the duties of a full-time employee, as well as to exclude the possibility of representing the interests of the company in court.
Cost recovery by the losing party
The costs of litigation, including the cost of legal assistance, may be awarded to the losing party. The court will set a deadline for debt repayment. The defendant will have to pay the amount in full or in proportion to the amount of satisfied claims.
The peculiarity of cost recovery is the ability to present them only if you can prove their value. According to the judicial process, they define the costs of attorney assistance for a specific instance.
Services have to be paid, and the court should then be given a receipt. Compensation can be claimed only during the time that the trial proceeding, otherwise you will have to apply a separate claim.
Compensation for other legal expenses
Fulfilling the instructions of their clients, lawyers bear associated costs: for example, it may be transport expenses, the cost of attracting specialists for consultation, ordering an examination or assessment, and so on.
Payment of additional costs of an attorney carried out by indicating their admissibility and the procedure for making compensation in the contract. You will need to have evidence that all designated expenses are related to the order being provided. If attorney conducts several cases and assignments at once, the allocation of a share of expenses will be necessary.
VALEN specialists have extensive experience in accounting and tax accounting of lawyer services. We provide assistance to large and small businesses, individual entrepreneurs and international corporations. To get a service or consult with specialists, dial: +7 (495) 7-888-096! We are also waiting for you at our office in Moscow.