Only legal expenses directly related to the business are eligible for tax deductions, excluding fees incurred by individuals such as owners or employees. Legal fees are considered business operating expenses and can be deducted. Sole proprietors are required to report these fees on IRS Schedule C, while landlords are required to report them on Schedule E.
The following is an incomplete list of legal services that are eligible for tax deductions and corresponds with the legal services that our law firm provides. To ensure accurate deduction of legal fees on your income tax return please consult with your accountant for tax advice.
The following legal fees can generally be deductible if they are directly related to the operation and management of your business:
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Start-up expenses: to form a company;
- Defending your business in litigation;
- Negotiating or drafting business agreements;
- Resolving disputes with business partners;
- Restructuring or reorganizing the business;
- Negotiating or drafting contracts with suppliers, customers, or partners;
- Collecting money owed to your business;
- Legal fees you incur in the course of your rental activity, if your rental activity is considered a business. Example, attorneys' fees incurred to evict a tenant or commercial lease dispute;
- Construction defect claim for the commercial space;
- Enforcing your trademark and copyright claims;
- Defending against or seeking removal of fake online reviews that damage your business's reputation.
An accountant would describe allowable deductions for legal (and professional) fees on a business income tax return, as follows:
- Legal and professional fees that are ordinary and necessary expenses of operating your business and that are directly related to your business are deductible as business expenses.
- Generally, legal and professional fees paid to acquire business assets are not deductible. Instead, you must add them to the basis of the acquired property when calculating depreciation.
Hope this helps!
