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Year-End Law Firm Financials: What to Review Before You Close 2025
- Chelsea Williams
- Jan 13
- 11 min read
By Chelsea Williams, Chief Financial Architect at Core Solutions Group
Specialized in law firm financial management with 10+ years serving law firms
Key Takeaways
Year-end law firm financials aren't about last-minute scrambling; they're about gaining clarity on your firm's true financial position before tax season arrives.
Before you close the books on 2025, you must review five critical areas: clean, accurate bookkeeping records; properly reconciled trust accounts; strategic owner compensation decisions; adequate cash reserves; and organized financials ready for your tax preparer.
Getting this right now saves thousands in tax penalties, prevents compliance violations, and sets you up for a profitable 2026.
It's early January 2026, and you're staring at twelve months of financial data, wondering: "Am I actually profitable, or did I just work my tail off for nothing?"
If you haven't already closed your books on 2025, you're either procrastinating or smart enough to know you need to get this right.
Here's the truth most law firm owners don't want to hear: Your year-end financials are only as good as the bookkeeping that went into them.
If you've been ignoring your numbers all year, scrambling to "fix everything" in the final weeks of December won't cut it. But if you've been staying on top of your legal accounting (or working with professionals who do), year-end should be a strategic review—not a crisis.
Let's walk through exactly what you need to review, why it matters, and how to close out 2025 with confidence.
Why Year-End Law Firm Financials Actually Matter
Before we dive into the checklist, let's address the elephant in the room: Why does this matter?
You might be thinking, "My tax preparer handles all this stuff. I'll just send them whatever and they'll figure it out."
Wrong.
Here's what happens when you don't properly review your year-end law firm financials:
Tax Consequences:
You overpay taxes because you missed deductions
You underpay taxes and face penalties and interest
Your tax preparer makes decisions based on incomplete or inaccurate data
Compliance Risks:
Trust accounting errors go undetected and multiply
Bar audits reveal violations that could have been caught and corrected
Missing documentation creates problems during investigations
Strategic Blind Spots:
You can't set realistic goals for 2026 without knowing where you actually ended 2025
You make hiring, spending, and pricing decisions based on guesswork
You miss opportunities to improve your law firm profitability
Cash Flow Disasters:
You think you have more money than you actually do
You don't know if you can afford the upcoming expenses
You're caught off guard by tax bills you should have anticipated
Bottom line: Year-end isn't just about compliance. It's about clarity. And clarity drives better decisions.
The 5 Critical Areas to Review in Your Year-End Law Firm Financials
1. Clean, Accurate Bookkeeping Records
What You're Reviewing: Every transaction, every categorization, every entry in your accounting system for 2025.
Why It Matters: Garbage in = garbage out. If your bookkeeping has been sloppy all year, your year-end financials are fiction. And making business decisions based on fiction is expensive.
What to Check:
☐ All bank accounts are reconciled through December 31, 2025
Operating account
IOLTA / IOLTA Trust Account(s)
Savings accounts
Credit card accounts
Every account should reconcile to $0.00 difference between your books and your bank statements. If they don't, you have errors that need correction before you close the books.
☐ All transactions are properly categorized
Review your chart of accounts and look for:
Transactions in "uncategorized" or "other" categories
Personal expenses mixed with business expenses
Inconsistent categorization (legal research sometimes under "subscriptions," sometimes under "office supplies")
Missing vendor names or descriptions
☐ Revenue is recorded in the correct period
This is especially critical for law firms. If you earned fees in December 2025 but didn't bill until January 2026, you need to decide (with your tax advisor) whether to recognize that revenue in 2025.
☐ Expenses are recorded in the correct period
The same principle applies. Did you receive a bill in December 2025 but not pay it until January 2026? That expense should be recorded in 2025.
☐ Loan payments are properly split between principal and interest
Only the interest portion is deductible. Make sure your bookkeeper isn't categorizing the entire payment as an expense.
If Your Books Are a Mess: Stop. Don't try to DIY twelve months of cleanup in two weeks. You'll make it worse.
This is exactly what our Accounting Backwork service handles. We specialize in cleaning up months (or years) of neglected bookkeeping so your year-end financials are accurate and audit-ready.
2. Trust Account Reconciliation (This Is Non-Negotiable)
What You're Reviewing: Your IOLTA trust account balance and all client ledgers.
Why It Matters: Trust accounting errors can cost you your license. Period. Year-end is your chance to catch and correct any discrepancies before they become bar violations.
The Three Way Reconciliation IOLTA Process:
Your trust account must be reconciled three ways:
Bank statement balance = what the bank says you have
Trust account ledger balance = what your accounting system says you have
Sum of all client ledger balances = what you actually owe to clients
These three numbers must match exactly. If they don't, you have a problem.
What to Check:
☐ Trust account reconciliation is complete through December 31, 2025
Have you performed a three way reconciliation IOLTA for the final month of the year? If not, do it now.
☐ All client ledgers have accurate, up-to-date balances
Review each client's trust ledger individually:
Are there negative balances? (Red flag—you've taken money you haven't earned)
Are there old balances sitting untouched for 6+ months? (May need to be returned or applied)
Do the ledger entries match your practice management system?
☐ Trust account transactions are properly documented
Every deposit and withdrawal should have:
Clear description of the transaction
Client matter number
Supporting documentation (retainer agreement, invoice, payment receipt)
☐ No commingling violations
Operating funds should NEVER mix with trust funds. Review all trust account transactions and verify:
No business expenses paid from trust account
No personal expenses paid from trust account
Your firm's fees were properly transferred from trust to operating (only after earned)
☐ Interest on trust accounts is properly remitted to your state's IOLTA program
Most states require automatic remittance, but verify this happened correctly throughout 2025.
Need Help with Trust Accounting?
Trust accounting is complex and state-specific. One mistake can trigger a bar investigation.
Download our free Trust Account Management Guide for step-by-step instructions on performing proper three-way reconciliations and maintaining compliance.
3. Owner Compensation & Profit Distribution Strategy
What You're Reviewing: How much you paid yourself in 2025 and how to optimize for taxes.
Why It Matters: How you compensate yourself has massive tax implications. Taking too much as salary costs you in payroll taxes. Taking too much as distributions can trigger IRS scrutiny. Getting this right requires strategy.
What to Check:
☐ Review your total owner compensation for 2025
Add up:
W-2 salary (if you're an S-Corp or C-Corp)
Distributions/draws you took
Bonuses paid
Benefits received (health insurance, retirement contributions, etc.)
☐ Verify your compensation structure is tax-optimal
This varies by entity type:
For S-Corps: The IRS requires "reasonable compensation" as W-2 wages. Too little salary = audit risk. Work with your tax preparer to determine the right balance between salary and distributions.
For LLCs (taxed as partnerships or sole proprietorships): You take owner draws, not salary. Make sure you've set aside money for self-employment taxes.
For C-Corps: You're an employee. Your salary should be documented and reasonable for your role.
☐ Plan for 2026 compensation structure
Based on your 2025 profitability, should you adjust your:
Monthly salary/draw amount?
Quarterly distribution strategy?
Bonus structure for yourself or your team?
☐ Consider the Profit First Method for 2026
If cash flow felt chaotic in 2025, implementing a system similar to the Profit First method can transform how you manage money in 2026.
The Profit First Method for Law Firms in Brief:
Instead of the traditional formula: Sales - Expenses = Profit
A cash management system flips it: Sales - Profit = Expenses
You allocate percentages of every dollar that comes in:
Profit (5-15%)
Owner Pay (40-50%)
Taxes (15-20%)
Operating Expenses (30-40%)
By setting aside profit FIRST and forcing your firm to operate on what's left, you build sustainable profitability instead of hoping there's something left after expenses.
Want to implement a cash management system in your law firm? Our Fractional CFO services include setting up allocation percentages, establishing separate accounts, and managing your cash flow system for you.
4. Cash Reserves & Working Capital Analysis
What You're Reviewing: Whether you have adequate cash reserves to cover emergencies and upcoming expenses.
Why It Matters: Revenue doesn't pay bills—cash does. You might have been "profitable" on paper in 2025, but if you don't have cash reserves, you're one bad month away from financial disaster.
What to Check:
☐ Calculate your current cash position
Add up all available cash as of December 31, 2025:
Operating account balance
Savings account balance
Money market accounts
Line of credit availability (available, not owed)
Do NOT include trust account funds—that's client money, not yours.
☐ Calculate your monthly operating expenses (fixed costs)
Review your 2025 expenses and determine your average monthly overhead:
Rent/mortgage
Salaries and payroll taxes
Insurance
Technology subscriptions
Loan payments
Other recurring expenses
☐ Determine if you have adequate cash reserves
Minimum Target: 3 months of operating expenses
Ideal Target: 6 months of operating expenses
Optimal Target: 6-12 months of operating expenses
If you don't have at least 3 months saved, building cash reserves should be a top priority in 2026.
☐ Identify upcoming major expenses for Q1 2026
What large expenses do you know are coming?
Tax payments (2025 taxes due April 15, 2026)
Equipment purchases or upgrades
Marketing campaigns
Team bonuses or raises
Professional development or conferences
Make sure you have cash allocated for these expenses—don't put them on credit cards, hoping revenue will catch up.
☐ Set a cash reserve goal for 2026
Based on your analysis, what's your target? Write it down and create a plan to reach it.
Not sure where you stand financially? Take our Financial Assessment Quiz to get a personalized snapshot of your firm's financial health and specific recommendations for improvement in just 9 questions.
5. Organized Financials Ready for Your Tax Preparer
What You're Reviewing: Whether you have everything your tax preparer needs to file accurate returns without drama.
Why It Matters: Tax preparers can only work with what you give them.
Incomplete information = missed deductions, errors, and extensions.
Clean, organized financials = lower tax prep fees and better results.
What to Prepare:
☐ Pull your final 2025 financial statements
Generate and review:
Profit & Loss Statement (January 1 - December 31, 2025)
Balance Sheet (as of December 31, 2025)
Cash Flow Statement (if available)
Review these reports for obvious errors:
Revenue or expenses seem unusually high/low?
Categories that don't make sense?
Balance sheet accounts that should be zero but aren't?
☐ Gather supporting documentation
Your tax preparer will need:
Bank statements (all accounts, full year)
Credit card statements (business cards, full year)
Loan statements and amortization schedules
Depreciation schedules for assets
Records of asset purchases or disposals
Mileage logs (if claiming vehicle deductions)
Home office documentation (if claiming home office deduction)
Receipts for major purchases or unusual expenses
☐ Document any unusual transactions
If there were one-time events in 2025, document them:
Large equipment purchases
Loan proceeds or repayments
Insurance settlements
Partner buy-ins or buy-outs
Business entity changes
Don't make your tax preparer guess what these transactions represent.
☐ Compile information on estimated tax payments made in 2025
Your tax preparer needs to know:
Federal estimated tax payments (dates and amounts)
State estimated tax payments (dates and amounts)
Payroll tax deposits
☐ Prepare a summary of owner compensation
Document how you were compensated in 2025:
Total salary (W-2 wages)
Total distributions/draws
Other compensation (bonuses, benefits)
☐ Schedule your tax preparation meeting early
Don't wait until March to contact your tax preparer. Schedule your meeting in January while they still have availability and can give your return proper attention.
Need monthly bookkeeping so next year's tax season isn't chaos? Our Monthly Law Firm Bookkeeping Service ensures your books stay clean, accurate, and tax-ready year-round, no more year-end scrambling.
Common Year-End Mistakes Law Firm Owners Make
Mistake #1: Waiting Until January to Think About Year-End
If you're reading this in January and haven't looked at your books since last tax season, you're already behind. Year-end should be a review process, not a cleanup operation.
Solution: Implement monthly bookkeeping so you're never surprised by your year-end numbers.
Mistake #2: Ignoring Trust Account Reconciliation
"I'll deal with it when I get audited" is not a strategy. Trust account violations can cost you your license, regardless of intent.
Solution: Perform three way reconciliation IOLTA every single month, not just at year-end.
Mistake #3: Making Tax Decisions Without Professional Guidance
Your college roommate's advice or a random Facebook group comment is not tax strategy. Entity structure, compensation, and deduction decisions should be made with your CPA or tax attorney.
Solution: Schedule a year-end tax planning meeting BEFORE December 31, not after.
Mistake #4: Confusing Revenue with Profit
You had a record revenue year! But your bank account is still low. Revenue without profit management means you're just busy—not building wealth.
Solution: Track law firm profitability monthly and implement systems like a cash management system to protect profits.
Mistake #5: Treating Year-End as a One-Time Event
If you're only looking at your financials once a year, you're flying blind 364 days. Year-end should be a deeper review of trends you've been monitoring all year.
Solution: Establish quarterly financial reviews at a minimum, monthly if possible.
How Core Solutions Group Helps with Year-End Law Firm Financials
You don't have to figure this out alone. We specialize in legal accounting and law firm financial management—it's literally all we do.
Here's how we help law firms close out their year with confidence:
Monthly Legal Bookkeeping Services
Stay on top of your numbers year-round so year-end is a review, not a rescue operation:
Weekly transaction coding
Monthly reconciliation of all accounts
Monthly three-way trust reconciliation
Clean, accurate financial reports delivered by the 15th
Annual preparation of books for tax filing
Accounting Backwork / Cleanup Services
Months (or years) behind on your books? We specialize in cleaning up the mess:
Catch up bookkeeping for any time period
Correction of categorization errors
Reconciliation of all accounts
Trust account cleanup and documentation
Organized financials ready for tax preparation
Law Firm Fractional CFO Services
Strategic financial guidance to maximize law firm profitability:
Year-end tax planning and owner compensation strategy
Cash flow management and Profit First implementation
KPI tracking and financial dashboard setup
Quarterly financial reviews and goal setting
Growth planning and profitability analysis
Your Year-End Action Plan
Don't let year-end law firm financials overwhelm you. Follow this action plan:
This Week:
Pull your December 2025 bank statements for all accounts
Verify all accounts are reconciled through December 31
Perform final trust account three-way reconciliation
Review P&L and Balance Sheet for obvious errors
Next Week:
Gather all supporting documentation for your tax preparer
Calculate your cash reserves and set 2026 target
Review owner compensation and plan 2026 structure
Schedule tax preparation meeting
Before January 31:
Deliver organized financials to your tax preparer
Set financial goals for 2026 based on 2025 performance
Implement or improve your monthly bookkeeping process
Consider Profit First or other cash management systems
Download our free Year-End CFO Checklist for a complete step-by-step guide to closing your books with confidence.
Close the Books on 2025 with Clarity, Not Chaos
Year-end doesn't have to be stressful.
When your legal accounting is handled properly throughout the year, closing the books is simply a review process—confirmation of what you already know about your firm's financial health.
If that's not your current reality, it's time to make a change.
Whether you need help catching up on 2025, implementing better financial systems for 2026, or getting strategic guidance on maximizing law firm profitability, we're here to help.
Ready to stop scrambling at year-end and start managing your finances with confidence?
About the Author
Chelsea Williams is the Chief Financial Architect at Core Solutions Group, where she has specialized in law firm financial management for over 10 years. She works exclusively with law firm owners to implement strategic financial systems, ensure trust accounting compliance, and build profitable, sustainable practices. Chelsea's expertise includes year-end financial planning, cash flow optimization, and fractional CFO services tailored to the legal industry. Her mission is to help law firm owners gain financial clarity so they can make confident, data-driven decisions that drive profitability and growth.
