Are Legal Expenses Tax Deductible?

The Internal Revenue Service (IRS) writes the tax code and lists the allowable deductions that a tax payer can deduct when filing their end of year tax return. If you paid an attorney for services this past year you may ask, ‘Are legal expenses tax deductible?’ The IRS first states that if you are claiming attorney fees, they must be reasonable. The code defines reasonable in rather vague terms. However, the prevailing industry fees for your community are the IRS standard. In other words, the rate you claim must be a similar rate which others paying attorney fees in your area have paid or will pay.

Some of the allowable deductibles are those fees paid to an attorney for business expenses, for estate planning, for criminal cases that are against a business, or for a divorce. You must identify whether the fees were paid for something that is income generating. This means that if the fees were for any reason associated with your business operations, then the total fees are deductible. You may have paid a fee to incorporate or establish your business. You may have paid for attorney services to maintain your business operations and you may have paid for fees that an attorney charged for mediation of a business related dispute. Because your business is expected to generate income, the expenses incurred in making a profit can be claimed when you file your return.

If you hire an attorney for estate planning, some or all of the fees may be deductible. If the estate plan includes the disposition or covers issues that are related to your business, you can claim those fees. Because part of the attorney fees may be attributed to personal estate planning, even when the primary purpose of engaging the attorney was for business disposition, you must specifically identify how those fees were allocated. Ask your attorney to separate the fees into personal and business.

If you have divorced or fought a custody battle for children, you cannot deduct the fees paid an attorney. These are personal expenses and cannot be attributed to a business. However, if you are spending money on an attorney to collect alimony or child support arrearages, you can claim a deduction for these expenses. The attorney must identify to amount of the fee and what the fee was for on an invoice so that you have supporting documentation for your individual income tax return.

Criminal prosecution and the defense of criminal charges, even if business related are not deductible. The IRS code prohibits a deduction for expenses incurred in defense of a criminal charge. However, if the business is charged with a crime and the individual operator is not charged, then the expenses paid for defense of the business are tax deductible. If you have paid legal fees for a criminal defense, for child support or alimony collection, or for starting or maintaining a business then you should seek the advice of a professional when filing your personal or business income tax return for that tax year. The question ‘Are legal expenses tax deductible?’ can be answered as yes, they may be, especially if they were incurred as an expense of generating income.

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