Are Tax Preparation Fees Tax Deductible?
Gain clarity on whether tax preparation fees are deductible. Learn the distinctions in eligibility and the necessary steps to support your claims.
Tax preparation fees are costs incurred when an individual or entity pays a tax professional or uses tax software to prepare and file tax returns. The deductibility of these fees depends on the taxpayer’s circumstances and the nature of the income reported. This article explores the rules governing the deductibility of tax preparation fees for individuals and businesses, and the importance of record keeping.
Tax Preparation Fees for Individuals
For individual taxpayers, the ability to deduct tax preparation fees has changed due to recent tax law. Historically, these fees were deductible as a miscellaneous itemized deduction, subject to a 2% adjusted gross income (AGI) limit.
However, the Tax Cuts and Jobs Act (TCJA) of 2017 suspended most miscellaneous itemized deductions subject to the 2% AGI limit. This suspension applies to tax years beginning after December 31, 2017, and before January 1, 2026. As a result, tax preparation fees paid by individuals for their personal tax returns are not deductible during this period, as outlined in Internal Revenue Code Section 67. For most individuals, the cost of preparing their annual Form 1040 and related schedules cannot be claimed as a deduction.
Tax Preparation Fees for Businesses
Tax preparation fees are deductible for businesses, including self-employed individuals, partnerships, S corporations, C corporations, and those with rental property income. These fees are considered ordinary and necessary business expenses under Internal Revenue Code Section 162. An ordinary expense is common and accepted in your trade or business, while a necessary expense is helpful and appropriate for your business.
This includes costs for preparing various business-related tax forms. For instance, a self-employed individual operating as a sole proprietor deducts these fees on Schedule C (Form 1040). These expenses are reported as a professional service expense.
Partnerships report these expenses on Form 1065, and S corporations on Form 1120-S. C corporations deduct these fees on Form 1120. Owners of rental properties can also deduct costs associated with preparing Schedule E (Form 1040) for their rental income and expenses. This includes fees for preparing payroll tax returns, excise tax returns, and other business-specific filings.
Record Keeping and Supporting Deductions
Maintaining precise records is important for all tax-related expenses, especially when claiming deductions. For tax preparation fees, particularly those for businesses, keeping detailed documentation is recommended. This documentation serves as proof to substantiate any claimed deductions in the event of an Internal Revenue Service (IRS) audit.
Relevant records include invoices or billing statements from your tax preparer or tax software provider, showing the services rendered and associated costs. Receipts and proof of payment, such as bank statements or canceled checks, are also important to demonstrate that the fees were paid. Engagement letters, if applicable, can further clarify the scope of services provided.
Even for individuals whose tax preparation fees are not currently deductible, retaining these records is beneficial. It provides a clear overview of professional service expenses and a historical record of tax compliance efforts. This ensures that if tax laws change in the future, or if an allowable business deduction is claimed, there is sufficient evidence to support it.