Are Accounting Fees a Deductible Investment Expense?

The deductibility of accounting fees for services like tax return preparation, investment-related bookkeeping, or strategic advice depends on the taxpayer’s specific circumstances. The rules differ significantly for an individual managing a personal stock portfolio compared to a small business owner or the fiduciary of a trust. The nature of the activity associated with the fee dictates its treatment on a tax return, making it important to understand who is paying the fee and for what purpose.

The Impact of Tax Law Changes on Individuals

For most individuals, the ability to deduct accounting fees for personal investment activities on a federal tax return is suspended through 2025. This change is a result of the Tax Cuts and Jobs Act of 2017 (TCJA), which eliminated the category of miscellaneous itemized deductions. This category was the mechanism through which individuals previously deducted fees for investment advice and tax preparation.

Prior to this change, these costs were deductible, but with a limitation. Taxpayers could only deduct the portion of their total miscellaneous itemized deductions that exceeded 2% of their Adjusted Gross Income (AGI). For example, if a taxpayer had an AGI of $100,000, the first $2,000 of these expenses were not deductible.

Under current law, fees paid for managing personal, non-business investments, such as those in a standard brokerage account, fall into this suspended category. This includes payments to an accountant for advice on buying or selling stocks or fees for preparing the parts of a tax return related to investment income.

Deductibility for Business Entities

In contrast to the rules for individuals, business entities can deduct accounting fees as an operational cost. The standard for this deduction is that the expense must be “ordinary and necessary” for carrying on the trade or business. This principle applies across various business structures for fees related to financial management and tax compliance.

For a sole proprietorship, these expenses are reported on Schedule C, “Profit or Loss from Business.” Owners of rental properties can deduct accounting fees associated with their rental activities on Schedule E, “Supplemental Income and Loss.” More complex entities also follow this logic; partnerships report these costs on Form 1065, and corporations use Form 1120 or 1120-S. The distinction is the direct connection to a business activity, as fees for bookkeeping or preparing business tax returns are considered part of the cost of doing business.

Special Rules for Trusts and Estates

Trusts and estates operate under a unique set of tax rules that permit the deduction of accounting fees. A fiduciary, such as a trustee or executor, can deduct these fees on the entity’s income tax return, Form 1041. This includes payments for services like preparing the trust or estate’s tax returns, fiduciary accountings, and other administrative financial tasks.

The guidance allowing this is found in Internal Revenue Code §67. This rule states that costs are deductible if they are paid in connection with the administration of the trust or estate and would not have been incurred if the property were not held in such an entity. This means expenses unique to the fiduciary role are deductible, and they are claimed directly against the trust or estate’s income, reducing its taxable income before any distributions are made to beneficiaries.

Allocating Fees for Mixed Use

Taxpayers often receive a single invoice from an accountant that covers a mix of services, some of which may be deductible while others are not. In these situations, it is necessary to allocate the total fee between the different activities. For example, a fee might cover preparing a personal tax return, accounting for a Schedule E rental property, and advice on a personal stock portfolio, but only the rental property portion is deductible.

The best way to handle this is to ask the accounting firm for an itemized bill that breaks down the charges by service. This documentation clearly separates deductible business-related fees from non-deductible personal ones.

If an itemized bill is not available, the taxpayer must make a reasonable allocation based on the time the accountant spent on each activity. For example, on a total accounting bill of $2,000, if the accountant spent 70% of their time on a Schedule C business, a reasonable allocation would allow for a $1,400 business deduction. This proration must be defensible if questioned, making an itemized invoice the preferred method.

State Tax Considerations

While federal law has suspended the deduction for personal investment and tax preparation fees, state tax laws may differ. Not all states automatically conform their tax codes to the changes made by the federal TCJA. As a result, some states may still permit taxpayers to deduct these accounting fees as an itemized deduction on their state income tax return.

This lack of conformity means an expense that is non-deductible on a federal return could generate a tax benefit at the state level. The rules for these deductions, including any income limitations similar to the old federal 2% AGI floor, vary significantly from one state to another. Taxpayers must look to their own state’s tax regulations to determine if they can claim these expenses.