Legal fees incurred for business purposes are tax-deductible. The deduction can be claimed on business returns (such as Form 1065 for a partnership) or directly on Schedule C of personal income tax returns.
The Internal Revenue Service allows individuals and businesses to deduct the cost of certain professional services, including legal fees, as a business expense.
To be eligible for deductions, however, the legal fees must be directly related to your business operations or be part of acquisition costs, which may include legal expenses to start or buy a business.
Here’s what we will cover in this article:
- Can You Write off Legal Fees?
- Can You Write off LLC Fees?
- Can You Write off Tax Preperation Fees?
- Can You Write off Licensing Fees?
- Can You Write off Online Classes on Your Taxes?
Can You Write off Legal Fees?
Legal fees that are routine and necessary for the operation of your business can usually be deducted as a business expense.
Consider the nature of the legal expense when determining whether or not you can deduct legal fees.
Personal Legal Fees
The general rule is that legal expenses incurred in the course of doing business are tax deductible. Legal fees for personal matters are almost never deductible. There are some exceptions, such as legal expenses incurred as a result of your trade or business.
Business Legal Fees
According to the IRS, legal fees paid by a taxpayer during a trade or business are generally deductible if they are ordinary and necessary business expenses.
The following are some examples of where you can claim tax deductions for business expenses:
- Attorney fees, court costs, and other similar expenses incurred in the production or collection of taxable income are deductible.
- Legal fees associated with a business’s bankruptcy are deductible.
- Generally, legal fees associated with handling, protecting, or maintaining the income-producing property are tax deductible.
- Attorney fees for defending and filing damage suits against a company are tax deductible.
- Legal fees incurred to defend a taxpayer’s trade or business against criminal charges are deductible. However, legal fees for defending a person against criminal charges are not tax deductible.
Depending on your accounting method, you can deduct legal expenses during the tax year.
If you use the cash accounting method, for example, you claim legal expenses as a business expense in the year in which you actually pay the expense, whereas if you use 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 for the maximum benefit, others must be deducted as miscellaneous itemized deductions, the total of which must be less than 2% of AGI.
Can You Write off LLC Fees?
A limited liability company’s (LLC) owners can deduct a certain amount of the company’s start-up and organizational costs. This is true regardless of how the LLC is structured in terms of taxation.
An LLC must incur start-up costs before it formally begins operations in order to claim this business tax deduction. These expenses include the costs of investigating or purchasing an LLC, marketing expenses, travel expenses, and so on. Once the business is up and running, ongoing costs can be deducted under the heading of operating business expenses.
Can You Write off Tax Preparation Fees?
Tax preparation fees are allowed to be deducted as a business expense by the IRS.
This includes the costs of hiring a tax professional to prepare your return and the costs of purchasing tax software and books, legal fees for representation in tax audits, tax planning advice, collections, and criminal investigations.
Can You Write off Licensing Fees?
You can write off license fees and expenses like many deductions if they qualify as business expenses. For example, a lawyer must pay an annual license fee to remain in the state. This fee can be written off.
License fees for personal purposes, such as pet licensing fees and marriage licenses, are generally not allowed as a tax deduction.
Can You Write off Online Classes on Your Taxes?
If you pay or reimburse any education expenses for your employees, you can generally include that as a tax deduction on your tax return. Generally included in the cost of books, equipment, fees, tuition, and supplies.
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 statement that shows clearly what part of the fees is deductible.
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