There’s no question, getting help from an attorney can be expensive. For some people, relying on quality legal counsel means the difference between business success and failure or bankruptcy and plenty. For those people that so play it smart and seek legal help when they need it, the IRS provides certain tax deductions for legal expenses.
As a general rule, most expenses that you can claim as miscellaneous itemized deductions on Form 1040 or 1040NR, Schedule A must be reduced by 2% of your adjusted gross income (“AGI”). This means that if your AGI is $200,000 per year, your qualifying deductions are deductible only if those deductions (taken together) exceed $4,000. There are some exceptions to this “2% Rule” and as we’ll discuss, some attorney fees are restricted by this rule and some are not.
Deducting Legal Fees for Personal Issues
If you have legal fees that are not associated with a taxable, money making endeavor, then those fees may be itemized, subject to the 2% Rule. Note: this is only the case if you decide to do itemized deductions and not take the standard deduction. So, what types of personal attorney fees might fall into the deductible category? Take a look:
- Fees related to doing or keeping your job
- Legal help evicting a tenant
- Estate tax planning
- Tax advice during divorce proceedings
- Getting an ex-spouse to pay past-due spousal support
- Bringing a discrimination claim
- Defending against criminal charges related to your trade
- Appealing a Social Security benefits denial
Essentially, you can deduct legal expenses that come up in your attempt to produce or collect taxable income or relating to the determination, collection or refund of any tax.
Some examples of non-deductible legal fees include:
- Name changes
- Seeking child support or custody of a child
- Closing on a home purchase
- Settling a probate or will matter between family members
- Prevailing in a personal injury lawsuit or wrongful death action
- Defending charges related to participation in a political campaign
These fees are non-deductible because they do not produce taxable income.
Deducting Legal Fees for Business Issues
Business legal fees are fully deductible and not subject to the 2% Rule. This includes fees incurred in sole proprietorships, partnerships, LLCs and corporations. There are, of course a few exceptions you need to watch out for.
For example, you may deduct up to $5,000 in legal expenses for start-up activities. Anything above that amount may be deducted over the course of 180 months. Additionally, legal fees associated with acquiring business properties are not instantly deductible, but rather, are added to the tax basis of the property and may be deducted annually via depreciation.
Some examples of situations in which you may deduct business legal fees include:
- Obtaining tax advice for your business
- Drafting and negotiating contracts
- Collecting money owed by customers
- Defending against employee lawsuits
- Defending against intellectual property claims
When seeking the help of an attorney, ask them to clearly show on billing statements what part of fees are deductible.
If you have questions about the tax treatment of your legal services, contact us today for more information.
Posted in: Tax Planning