PROFESSIONAL SERVICES

Legal Fee Tax Deductions

Business owners can deduct legal and professional fees to the extent they are an ordinary part of and necessary to operations. Legal and professional services is a broad category that generally includes expenses for your lawyer, accountant and any other professional consultants you may hire. Legal and professional fees for entrepreneurs and sole proprietors can vary widely depending on the nature of your business, however, most businesses will incur some type of professional expenses during the year so this deduction should not be overlooked.

ENTREPRENEUR

After starting operations, Chester incurred $6,000 of legal costs drafting customer contracts and reviewing vendor agreements. Fortunately, these costs would generally be considered ordinary and necessary legal expenses and be deductible on his Schedule C.

AIRBNB HOST / LANDLORD

This year, Roxy, an Airbnb host paid a local CPA $400 to help her prepare her Schedule E for last year. When she prepares her Schedule E for this year, she will be able to deduct the $400 tax preparation fee for her prior year Schedule E.

REAL ESTATE AGENT

Frederik, a real estate agent, recently listed a property that was in terrible condition. He spent $15,000 on professional fees charged by an engineer, architect, and designer he hired to help him bring his new listing to market. When he prepares his Schedule C, all of these costs could be deductible business expenses.

AUTHOR / SPEAKER

Desiree is an expert in her field who travels around the country to talk at conferences and private speaking engagements. The IRS has questioned some of the business travel expenses Desiree deducted last year. When Desiree files her taxes this year, she can deduct the cost of the CPA she hired to help her navigate the inquiry.

PROFESSIONAL SERVICES

Raul is a sole practitioner psychologist who is being sued by a client for malpractice. Raul hires a well recommended attorney to help him negotiate a settlement. Assuming Raul’s business is the defendant in the suit, he can deduct the legal fees he incurs for his lawyers time, and will likely also be able to deduct whatever settlement he pays out.

HOW HURDLR WORKS FOR
ENTREPRENEURS

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WHAT TO KNOW ABOUT LEGAL EXPENSES

The IRS allows businesses to deduct most legal expenses because generally these costs will support the management of income-producing property or help facilitate revenue generation or collections.
For Individuals, tax preparation fees are usually deducted on Schedule A, however, if you are a business owner accounting fees for preparation of your business tax returns are deductible as business expenses on the schedules being prepared by your accountant.
Generally, reimbursed legal expenses to business owners are not deductible unless the legal services rendered are directly related to business activities.
If your business pays a professional services provider over $600 during the year you will need to issue them a 1099-MISC at the end of the year. Refer to our 1099 page for additional details.

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