How to Deduct Legal Fees for Business
Depending on why you sought legal counsel, the legal fees you incur as part of your business may be tax deductible. This area of the tax code is a little murky because the tax code does not specifically address legal fees. Consequently, it's important to define the context of your business legal fees to justify them as a business expense.
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Instructions
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Obtain a detailed accounting of all legal fees owed by the business or by you personally in conjunction with the business. Your attorney should be able to provide you with itemized bills that include descriptions of all services rendered and how they pertain to your business.
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Determine whether the legal fees meet the requirements for expenses related to carrying on a trade or business. These legal fees are tax-deductible.
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Evaluate whether the legal fees are "ordinary and necessary" to your business. This is a vague description that generally fits all legal fees that are related to any business.
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Assess the reasonability of the amount of legal fees. Fees that are exorbitant or extraordinary in comparison with the service that was provided do not qualified for a deduction.
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Include only legal fees that were either paid or incurred during that tax year. When the service was provided is irrelevant.
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Verify that the legal fees incurred were generated for the benefit of the business. Legal fees paid for another taxpayer that do not directly or indirectly affect the business are not deductible.
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Determine which non-business legal fees qualify for a deduction. Some fees that are not directly related to carrying on a trade or business can be tax-deductible also.
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Examine non-business legal fees that are connected to producing or attempting to collect taxable income. The results of the attempts to collect income are irrelevant. Whether or not the collection effort was successful, the legal fees are deductible.
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Include legal fees related to managing, safeguarding or maintaining property related to the business. This can include rental property or business premises, for example.
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Deduct legal fees incurred in the attempt to determine, collect or obtain a refund of any tax.
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Enter the legal fees you can deduct on line 17 of Part II on your Schedule C tax form and file it with your taxes (see Resources below).
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Tips & Warnings
If legal fees cannot be strictly classified as personal, capital or business expenses, you may still be able to deduct the portion of those fees that relates to the business. You need to separate which fees are deductible and which are not.
Keep a breakdown of how you determine which legal fees are deductible with your tax returns and supporting documents for at least 3 years in case you are audited by the IRS.
