How To Deduct Legal and Other Professional Fees for Business

Deducting Legal Fees for Business

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Navigating taxes for your business may be challenging but you may have some respite when it comes to deductions on fees you pay to get some professional help. You may deduct legal fees paid to attorneys and fees paid to other professionals for "ordinary and necessary" expenses of your business, including expenses for helping you start your business.

Key Takeaways

  • The IRS allows businesses to deduct legal and professional fees for "ordinary and necessary" expenses
  • Businesses may deduct up to $5,000 in startup costs for total startup expenses of up to $50,000. Deductions are limited and need to be amortized for higher total expenses
  • The forms you need to report for such expenses differ with the type of business ownership
  • You cannot deduct legal or professional fees incurred for personal reasons

Legal and Professional Fees for Business Startup

When you are starting a business, keep track of all your costs while you are investigating business possibilities, creating the business, and setting up your organization. You will then need to separate costs for startup vs. organization.

Organizational costs include fees for services performed by an attorney to help you organize your business, before the end of your first tax year. These fees are considered capital expenses, not operating costs, and they must be amortized (spread out) over a specific number of years. An example would be an attorney's fee for helping you filing business registration documents with a state and preparing corporation bylaws.

Operating costs for startup are those you would be able to deduct if you were operating the business. Startup legal fees could be for helping you review contracts, hire executives, or travel to negotiate purchase of a business.

Note

You can deduct up to $5,000 of startup costs out of total startup costs of up to $50,000. For total costs greater than that the $5,000 limit reduces by the amount the cost exceeds $50,000 but does not fall below zero. Any additional startup and organizational costs must be amortized.

Legal and Professional Fees on Your Business Tax Return

Where you include these fees depends on whether they are deducted or capitalized.

In most cases, you will be deducting these fees as part of your normal business activities. Here's where you would include these deductions on your business tax return:

  • 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 have to amortize startup and organizational costs, you would include them in Other Expenses on your business tax return.

If you aren't sure which line of your return to use, check with your tax professional or use an online tax software program.

Note

Including legal and professional fees on your tax return is more difficult than it looks, because some of these expenses must be depreciated or amortized. Check with your tax professional or use an online tax software program.

Reporting Payments to Attorneys and Professional Advisors

Reporting payments to attorneys is complicated. Starting with the 2020 tax year, payments to attorneys may be reported on one of two forms, depending on the type of payment:

Fees paid to an attorney or other legal service provider of $600 or more are reported on Form 1099-NEC (Box 1). These are the payments for legal services, whether they are paid as a retainer or fee.

Gross proceeds to an attorney are reported on Form 1099-MISC (Box 10). These are payments made to an attorney that are not for legal services, but, for example, as in a settlement agreement.

Report payments to accountants and other professionals if you paid that person or firm $600 or more in deductible fees in a year. Use Form 1099-NEC to report these payments. This form is given to people you pay but who are not employees.

You must give the form to the recipient and file the form with the IRS by January 31, after the end of the tax year.

Note

Before you complete a 1099-MISC or 1099-NEC form for an attorney or other professional, you must have this person complete a W-9 form. This form lists the recipient's tax ID number and information about the name and address.

You Can't Deduct Personal Payments to Professionals

Fees paid to attorneys or other professionals for personal advice, personal taxes, personal investments or retirement planning or personal legal services are not deductible business expenses

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, Schedule C for business income is part of your personal tax return if you own a small business. You can deduct the cost for a tax professional to prepare your Schedule C, but not the cost of preparing the rest of your personal tax return.

Note

Use your business checking account or business credit card to pay for the business portion and your personal account 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. 

Frequently Asked Questions

Can I deduct legal fees as miscellaneous if my business does not start?

According to the IRS, there are two types of costs associated with an unsuccessful business venture. The first are costs incurred before making the decision to start or acquire a business such as research. These costs are not deductible. The second type of costs are those incurred while starting or acquiring a business and these can be deducted.For example, if you hired an attorney to draw up contracts to acquire a business but the deal falls through, you may be able to deduct the legal fees.

If my business gets sued, can I deduct legal fees?

According to the IRS, legal fees paid in relation to "doing or keeping your job, such as those you paid to defend yourself against criminal charges arising out of your trade or business," are deductible. However, any legal fees and payments resulting from a sexual harassment or sexual abuse case are not deductible if there is a nondisclosure agreement in place.

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Internal Revenue Service. "Publication 535 (2021), Business Expenses."

  2. Internal Revenue Service. "Publication 535 (2021), Business Expenses- Starting A Business."

  3. Internal Revenue Service. "2021 Instructions for Schedule C - Part V. Other Expenses."

  4. Internal Revenue Service. "Instructions for Forms 1099-MISC and 1099-NEC."

  5. Internal Revenue Service. "Publication 535 (2021), Business Expenses- Personal Versus Business Expenses."

  6. Internal Revenue Service. "Publication 535 (2021), Business Expenses- Going Into Business."

  7. American Express. "Tax Deductions: The Bright Side Of Failure."

  8. Internal Revenue Service. "Publication 535 (2021), Business Expenses - Miscellaneous Expenses."

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