When are attorney fees tax deductible: On what basis fees becomes deductible

Legal fees of the attorney can be tax deductible on different grounds. The deduction can be made if the fees have been incurred in business matters. The deduction of the legal fees would then be claimed on business returns. For instance, if the business has been done in partnership, you need to fill Form 1065.

The answer to the question: when are attorney fees tax deductible depends on the circumstances and legal expenses.

According to the Internal Revenue Code (IRC) that works under the supervision of the United States Congress, and sanctioned by the sitting president, the code mentions that except for the legal expenses, like itemized deductions, nothing should be deducted from the amount that is allowed for the living and other family expenses.

IRC also allows individuals and business personnel to claim the money they incur to obtain the services of any professional which can be treated as legal expenses.

However, for fee deduction to apply, the legal expenses should directly relate to the business procedures or the expenses which involve the procurement costs, including a legal fee to start or take over the business.

Can you write off Legal fees?

Attorney fees that are legally acceptable, and necessary expenses that directly relate your business to run and make it operational, are generally included in deductible business expenses. To know if you are able to write off the legal expenses, you need to check the nature of the expenses, i.e., personal or business legal expenses.

Personal Legal fees

According to the general rule for legal expenses, business-related expenses are tax-deductible. As far as the personal issues legal expenses are concerned, they are not. There are particular exceptions that apply to your business regarding legal expenses that are detailed as under.

Business Legal fees

According to the rules stated by IRC, the legal expenses that are incurred by taxpayers in the specific period of the trade or business, are subjected to be tax deductible, if the legal expenses are necessary and ordinary, such as contract making, merger reports, employee contracts, etc.

Some examples, where the tax deduction can be claimed for business legal expenses are:

  • Court fees, attorney fees, and similar expenses, if the expenses are incurred under the duration of collection of the taxable income and production of the materials
  • Legal expenses that are linked with bankruptcy are deductible.
  • The legal expenses including the attorney fees and the court expenses that are incurred during the dispute resolution of the lawsuit and filing the damage suits are deductible.
  • Legal expenses that are connected to protecting, maintaining, and handling the property and the income-generating sources are deductible.
  • Legal expenses that are incurred to protect against the criminal charges connected to the business and trade of a taxpayer are deductible. On the other hand, attorney’s fees to defend against the criminal charges are not.

The legal tax deduction expenses – during a tax year – depend on the method you use to determine the tax deduction.

For example, if you or your company uses the accounting method, you can claim the legal expenditures as your business expenses in the pertaining year you paid the outlays. Meanwhile, if you opt for the accrual accounting method, you can have the opportunity to claim the legal expenses when the lawyer will provide the services, or you will choose to pay for it.

Can Tax preparation fees be written off?

Yes, the IRC allows the business owners to write off the tax preparation fees, as it is considered a business expense.

Here, the ability to write off legal expenses is not limited to hiring the professional tax preparer for your tax returns, but it also includes expenses incurred for purchasing the software used to calculate company’s tax deductibles, tax-related courses, books, or fees for legal representation in audits, investigation (criminal or collection related), and advice for tax planning.

Can Licensing fees be written off? 

If you declare your license fee as your business expense, then you can write off the fees. To understand more let’s take an example:

If a lawyer wants to continue working in the state, then he must pay the annual license fee to keep his lawyer’s license valid. In this case, the fees can be written off.

Again, licensing fees like pet licensing, marriage, or divorce licensing are included for personal legal purposes, and are not allowed to be counted in tax deductibles.

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