December 14, 2019  
 
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Small Business Taxes

 

Deducting Business-Related Legal Expenses

Are legal fees tax deductible? Absolutely. But of course there are a few exceptions on tax deductions for business-related legal expenses.

Can I deduct legal expenses as a business tax deduction?
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Absolutely. Any legal expenses that are ordinary and necessary and directly related to operating your business are deductible.

Deducting Business Legal Fees

If you file Schedule C, as many business owners do, you would include this deductible expense on Line 17, Legal and Professional Services.

You cannot, however, deduct any legal fees that are associated with your personal life and that are not related to your business.

Another exception to deducting lawyer fees as an expense is that some attorney fees may be capitalized. Specifically, any lawyer or attorney costs associated with starting the business can be capitalized.

Under tax law, you may elect to amortize these start-up costs ratably over a period of 60 months, commencing with the month in which the business begins. Note, however, that under Section 195 of the Internal Revenue code, business owners can deduct many of their startup expenses, up to the current maximum defined by the IRS, in the year the business is launched.

One more exception on deducting business legal expenses -- legal costs incurred in connection with arranging debt-financing for your business must be capitalized and should then be amortized over the life of the loan.

Similarly, legal costs involved with buying an asset are not deductible. Instead, they are capitalized as part of the asset's tax basis.

The types of legal expenses that many business owners deduct after they have gotten past the startup stage (and that don't otherwise require capitalization) include: applying for patents, trademarks and copyrights; preparing and revising contracts; collecting debts; getting advice on employment issues; and other instances in which an attorney represents the business owner in legal matters.

You may be wondering if you can deduct legal fees related to criminal charges brought against a business owner. Maybe "a friend" of yours needs to know this information? Well, the answer is that those legal expenses are absolutely deductible, as long as they directly relate to your business. This is often a subject of some debate.

Deducting Legal Fees As an Individual Taxpayer

What about non-owners? Can they deduct business legal expenses?

Individuals can also deduct legal fees that are related to their job, provided those fees are not reimbursed by the employer.

In this case, the employee would deduct those legal expenses as miscellaneous itemized deductions on Schedule A (Form 1040 or Form 1040NR). There is a cap to that tax deduction. You can only claim the amount of expenses that is more than 2% of your adjusted gross income. So, in other words, you calculate the deduction on Schedule A by subtracting 2% of your adjusted gross income from the total amount of these expenses.

Good luck filing your taxes. Always consult with a tax professional to ensure that you get accurate information that reflects the latest tax laws and tax court judgments.

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Schedule C Gross Income


Conversation Board

Have any small business tax advice or comments on business tax deductions to share? We welcome all questions, comments, tips and business advice.

chocentury 8/21/2010

I was a co-plaintive in a business lawsuit. Attorney fee was not contingent. Case overlap was 3 years. During the time of the case, legal fees were paid. Amount of legal fee recovery from defendant unknown. As such, the actual amount of legal fees were uncertain and could not be fully determined. Case concluded and settled in the 3rd year. Portion of the legal fees paid was recovered. In this case, should the fees be held as deferred expense and be deducted in the year that the amount recovered when the actual net cost were certain ?


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