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No one wants to pay taxes, so let’s talk about a deduction that you may not have considered. If you used an attorney in the past year, you might have the ability to deduct the attorney’s fees and other legal fees from your taxes. Some legal fees are tax deductible, and some are not. Here is a list of some of the deductible and non-deductible types of legal fees.
Tax Deductible Legal Fees
1) Fees associated with creating or forming a corporation or limited liability company. There is a cap on the deductible per year, but it can be deducted over the first 60 months you are in business if over that cap.
2) Fees and expenses that are ordinary and necessary expenses directly relating to operating your business. Here are examples, this is not an exhaustive list:
a) Collecting money owed by a customer.
b) Negotiating or drafting of contracts for the sale of goods and services.
c) Defending against trademark, copyright or patent claims.
3) Fees associated with resolving tax issues, advice, or preparation of tax forms related to your business.
4) Fees associated with rental or royalties on properties for which you earn income. (as long as these properties or royalties qualify as a business and not income producing activity.) This applies to things like evicting a tenant.
5) Fees associated with creating or acquiring property, including real property, are not immediately deductible. Instead, they are added to the tax basis of the property and may be deducted over time through depreciation.
6) Fees associated with whistleblower claims.
7) Fees associated with unlawful discrimination claims. (This applies if you are the Plaintiff bringing the action or the Business defending the action.)
8) Fees associated with adopting a child if you qualify for the federal adoption tax credit.
9) Fees associated with certain personal property claims against the Federal Government where damage was caused to the property. This applies to civilians, federal employees, and even military.
Non-Tax Deductible Legal Fees
1) Fees related to non-business tax issues or tax advice.
2) Fees you pay in connection with the determination of collection or refund of any taxes.
3) Personal legal expenses such as:
a) Child Custody
b) Purchasing Real Estate
c) Breach of Promise to marry
d) Civil lawsuits related to personal relationships
e) Criminal charges related to you as an individual
f) Personal injury
g) Title Preparation
h) Estate Planning such as Will preparation
i) Property claims or settlements
j) Divorce
k) Name Change
4) Fees associated with defending civil or criminal charges that arise from your participation in a political campaign.
Since not all legal fees are deductible, how do you ensure that the IRS will honor the deductions? Talk to your attorney about providing a detailed invoice that states what the fees/expenses/costs are associated with. If you have deductible and non-deductible expenses from the same attorney, ask him to split them into separate invoices to ensure you have clear evidence to provide the IRS backing up your claimed deductions.
If you need assistance setting up an LLC, drafting contracts, revising contracts, contract negotiations, defense in business litigation, or any other business related legal counsel please give me a call. My law firm and I are equipped to help you navigate all of the business related challenges you may have. I am also happy to provide a detailed invoice or split invoices so that they can be effectively utilized for tax deductions.
** I am not a tax attorney and I have not thoroughly reviewed the 2020 or 2021 tax code changes. Attorney's fee and legal expense deductions have been altered in the past and can be changed again at any point. Consult with a tax professional regarding what legal fees/costs/expenses you can deduct from your taxes in any given year.