Deducting Legal and Professional Fees for Business
Fees for Accountants and Attorneys
You may deduct fees paid to accountants, attorneys or other professionals who are independent contractors, for "ordinary and necessary" expenses of your business. This includes appraisers, systems analysts, consultants, and bookkeepers. The IRS specifically lists accountants and attorneys under the category of legal and professional fees, but other professionals can be included.
What You May NOT Deduct as Legal and Professional Fees
Some of these professional fees and costs are specifically not deductible as business costs, while others may be deductible in other places on your business tax return.
Personal Expenses: Fees paid to professionals for personal advice, personal taxes, or personal legal services are not deductible business expenses. This would apply to monthly fees (for bookkeeping, for example) and for annual or one-time payments. For example, if you have tax preparation fees for both your business and personal taxes, you'll need to separate the cost between the two portions of your return.
For example, if you must include your business net income on Schedule C along with your personal tax return, you will need to ask your tax preparer to bill you separately for the Schedule C and the rest of your tax return. Then use your business checking account or business credit card for the business portion and your personal funds for the personal portion.
If the business and personal work are not so easily separated, you should estimate what percentage of the work is business-related, and pay only that percentage from your business account.
Professional Lobbyists: You may not deduct fees paid to professional lobbyists to represent your company's interests in a local, state, or federal legislature.
Deducting Purchase of Business Assets
If you pay legal fees or other fees to professionals to help you with the purchase of a business asset (like a building or other property), you can't deduct these costs under the "legal and professional fees" category.
You must include these fees in the cost of the business asset, which is then capitalized.
Deducting Business Startup Fees
Fees paid to an attorney or accountant as part of the startup of your business cannot be considered in the category of legal and professional fees. These fees part of the cost of business startup, and they must be included in this cost. Some of the cost of startup may be considered an expense in your first year of business, but the rest of these startup costs are spread out over several years. Some of these legal and professional fees for a business startup might include:
- Cost of hiring an accountant or consultant to set up your business accounting system and recordkeeping system
- Cost for an attorney to help you register your business legal entity with your state
- Cost for an attorney to set up your corporate records and prepare your bylaws, if you are starting as a corporation
- Cost for an attorney to write your partnership agreement for a partnership or operating agreement for an LLC.
Where to Show these Expenses
- For sole proprietors and single-member LLCs, show these expenses in the "Expenses" section of Schedule C
- For partnerships and multiple-member LLCs, show these expenses in the "Deductions" section of Form 1065
- For corporations, show these expenses in the "Deductions" section of Form 1120.
If you aren't sure which line of your return to use, check with your tax preparer or use an online tax software program.
Reporting Payments to Legal and Professional Advisors
You may need to file a 1099-MISC showing the amount you paid to legal and professional advisors if you pay any of these individuals more than $600 in a calendar year. There are some exceptions to this requirement. Knowing about who to give a 1099-MISC form to is complicated, especially when it comes to attorneys. This article gives you more information on who must receive a 1099-MISC form.
Disclaimer: This article presents general information; I am not a tax attorney or tax preparation specialist. Refer to IRS publications and consult with your tax preparer before deducting expenses.