Tax Deduction for Legal Fees: Is Legal Fees Tax Deductible for Business?
Legal fees are tax deductible if the fees are incurred for business matters. The deduction can be claimed directly on the Schedule C of the income tax returns.
The Internal Revenue Service allows individuals and businesses to claim as a business expense the money they pay for certain professional services, which includes legal expenses. However, to be eligible for deductions, the legal fees must be directly related to your business operations or be a part of acquisition costs which may include legal expenses to start or buy a business.
What this article covers:
- Can You Write off Legal Fees?
- Can You Write off LLC Fees?
- Can You Write off Tax Preparation Fees?
- Can You Write off Licensing Fees?
- Can You Write off Online Classes on Your Taxes?
Can You Write off Legal Fees?
Legal fees can be tax deductible when it is used for collecting of income or collecting, acquiring or calculating tax for business as well as non-business purposes. To assess if you can write off legal fees, you need to consider the nature of the legal expense.
Personal Legal Fees
The general rule is that the business-related legal expenses are tax deductible. While individual sass general rule cannot claim deductions, there are certain exceptions to this rule. According to the IRS Publication 529, you can deduct the number of miscellaneous expenses that are more than 2% of your adjusted gross income.
Unreimbursed employee expenses
You can deduct legal fees related to doing or keeping your job, for example, you’re allowed to claim a deduction for legal expenses that you incur lawsuit between your employer and you.
Other legal expenses
To produce or collect income that must be included in your gross income
To manage, conserve or maintain property held for producing such income
To determine, contest, pay or claim a refund of any tax
Business Legal Fees
According to the IRS, the legal fees incurred by a taxpayer in the course of a trade or business are generally deductible if they are ordinary and necessary expenses of the business.
Some instances where you can claim tax deductions for business expenses are:
- Attorney fees, court costs, and similar expenses if these costs are incurred during the production or collection of taxable income
- The legal fees connected with the bankruptcy of a business are deductible
- Legal fees linked to handling, protecting or maintaining income-producing property are usually tax deductible
- The attorney fees that are charged for defending and filing damage suits in a business are deductible
- Legal fees incurred to defend against criminal charges related to a taxpayer’s trade or business are deductible. However, legal fees for defending criminal charges against an individual is not tax deductible
The deduction of legal expenses in the tax year depends on which accounting method you use. For example, if you use the cash accounting method, you claim legal expenses as business expenses in the year in which you actually pay the expense while under the accrual accounting method, you can claim the expense when the lawyer provides the service or when you pay for it.
While some legal fees can be deducted on business schedules and provide the maximum benefit, others have to be deducted as miscellaneous itemized deductions, the total of which is subject to a 2% of AGI deduction floor.
Can You Write off LLC Fees?
The owners of a limited liability company (LLC) can deduct start-up and organizational expenses incurred by the business. This is irrespective of how the LLC is designated in terms of its tax structure.
To claim this business tax deduction, an LLC has to incur start-up costs before it formally begins its operations. These start-up costs include the costs associated with investigating or actually purchasing an LLC, marketing expenses, travel costs etc.
Once the business is officially open, ongoing costs can be written off as well under the category of operating business expenses.
Can You Write off Tax Preparation Fees?
The IRS allows business owners to deduct tax preparation fees as a business expense.
This is limited not just to the expenses of hiring a tax professional prepare your return but also expenses related to purchase of tax software and tax-related books, legal fees for representation in tax audits, advice on tax planning, collections and criminal investigations.
Can You Write off Licensing Fees?
Like many deductions, you can write off license fees and expenses if they qualify as a business expense. For example, a lawyer must pay an annual licensing fee to remain licenses in the state. This fee can be written off.
License fees for personal purposes such as pet licensing fees and marriage licenses are generally are not allowed as a tax deduction.
Can You Write off Online Classes on Your Taxes?
Employees who take online classes to improve their job skills may be able to deduct tuition and related costs as unreimbursed employee expenses. Related costs include books, supplies, lab fees and other expenses related to the coursework.
Classes that don’t improve the taxpayer’s skills in his or her line of business are not eligible for a tax deduction.
If you’re still concerned about whether you’ll be able to deduct legal fees, ask your attorney if any of the fees he or she will charge will be tax deductible. You could also ask your attorney to prepare a billing a statement that shows clearly what part of the fees is deductible.