The Tax Preparation Fees Deduction: Who Can Still Claim it?
Having your taxes prepared is still deductible for some taxpayers
Taxpayers used to be able to deduct costs associated with preparing their tax returns if they itemized their deductions, but that tax break disappeared for most in 2018, after the Tax Cuts and Jobs Act (TCJA) took effect.
Admittedly, it wasn’t that great a deduction. Itemizing to claim it meant filing Schedule A with your tax return and forgoing the standard deduction, which the TCJA more or less doubled. And it fell into the category of miscellaneous deductions, so you could only deduct expenses that exceeded 2% of your adjusted gross income (AGI). A handful of taxpayers can still claim tax preparation fees, however, and they’re not subject to these restrictive rules.
Who Can Still Deduct Tax Preparation Fees?
Only the self-employed can claim a deduction for tax preparation fees in tax years 2018 and later. This means that you must be one of the following:
- A sole proprietor who files Schedule C with your return
- A farmer who files Schedule F with your tax return
- Someone who derives income from rental properties or royalties and reports that income on Schedule E
Statutory employees can also still claim this expense on Schedule C. Statutory employees are effectively independent contractors, but they can be treated as employees for tax purposes. They include:
- Drivers who distribute certain food products or beverages other than milk and who are paid on a commission basis
- Drivers who pick up or deliver dry cleaning or laundry and who are paid a commission
- Full-time traveling or local salespersons, if this is their primary source of income
- Individuals who work remotely from home provided that the employer dictates their tasks and provides their supplies
- Life insurance sales agents
Check with a tax professional if you think you might fall into one of these categories because the rules are complicated.
What Portion of Fees Is Deductible?
The next hurdle is determining exactly what portion of your tax preparation fees you can deduct. You’re covered for the cost of meeting with a tax professional for advice, as well as for having them prepare your return. You’re also covered if you opt to make use of tax preparation software. Legal fees and audit representation qualify as deductible, as do any publications or books you might buy for a better understanding of your tax situation, and even the cost of e-filing. But there’s a catch, of course.
An accountant might charge you $500 to prepare your tax return, but you won’t be able to claim that much. You can only claim the portion of their fee that’s attributable to preparing your Schedule C, E, or F—in other words, the business portion of your taxes. Everything else falls into the category of a personal miscellaneous expense that’s no longer tax-deductible.
You must deduct these tax preparation costs and fees in the same tax year in which you pay them.
Claiming the Deduction on Schedule C
Tax preparation fees are “legal and professional services” on Schedule C. That’s Line 17 in Part II of the schedule, “Expenses.” They can include anything you might have to spend to resolve a tax dispute with the IRS over your profit or loss from business.
Claiming the Deduction on Schedule F
Schedule F is “Profit or Loss From Farming.” Tax preparation fees fall into the category of “other expenses” on this form, which appears at Lines 32 a through f. The IRS wants you to break down what these expenses were for on the lettered lines. For example, you might enter “tax prep fees” on Line 32a and “office expenses” on Line 32b. Again, these tax costs must directly relate to your farming business, not personal tax issues.
Claiming the Deduction on Schedule E
Schedule E is for “Supplemental Income and Loss,” and covers a wide variety of tax situations and entities, including income from renting out real estate or collecting royalties. You can deduct the costs of tax return preparation that relates to either of these income sources, but again, you can’t deduct the cost of preparing your entire tax return. You can only claim the cost of preparing this and any other related schedules, or for tax advice or issues pertaining directly to this income.
This can be a bit tricky if you’re in the business of being a landlord and you lived in or used any of your properties personally during the tax year. Now you’re not just breaking out business-related tax prep costs, but you—or your tax professional—must also determine what percentage of your business costs are deductible. You can only deduct all your expenses if you personally used the home or unit for 14 days or less, or 10% of the time it was rented to others, if it sat vacant for a while. You must also have rented it at fair market value.
You can claim tax-related expenses from rental income or royalties in Part I of Schedule E according to these rules. They’re “legal and other professional fees” on this schedule and they’re entered on Line 10.
What About State Returns?
The IRS also has you covered when it comes to preparation of state returns and state tax issues, too. This deduction is available for all things tax-related, provided those taxes are associated with your business. The same goes for any local taxes you might be dealing with. If you spent it on your business, you can deduct it according to these rules and guidelines.
As for state-level tax preparation fees deductions, check with a local tax professional to find out what applies in your state. The taxation process can vary considerably from state to state—some have no income tax at all, and two states tax only dividends and interest. Various states might, or might not, offer this deduction.
IRS.gov. "Tax Reform Affects If and How Taxpayers Itemize Their Deductions." Accessed Aug. 13, 2020.
IRS. “2019 Instructions for Schedule E.” Accessed Aug. 13, 2020.