Can I Write Off Legal Fees on My Taxes?
Explore the tax implications of legal costs. Learn which fees qualify for deduction and how to report them accurately.
Legal fees, while often substantial, present a complex area concerning tax deductibility. While many legal expenses stemming from personal matters are generally not deductible, certain types of legal fees can be written off if they are directly related to specific income-producing activities or business operations. Understanding the specific rules and classifications is essential for taxpayers to determine if their legal expenses qualify for a deduction. The Tax Cuts and Jobs Act (TCJA) of 2017 significantly altered some deduction rules, particularly for individuals, making it more important to understand current guidance.
General Eligibility for Deducting Legal Fees
The Internal Revenue Service (IRS) generally allows the deduction of legal fees if they are considered “ordinary and necessary” expenses directly related to a trade or business, the production of income, or the determination, collection, or refund of any tax. An “ordinary” expense is one that is common and accepted in a particular industry, while a “necessary” expense is helpful and appropriate for the business or income-producing activity. This standard is fundamental in differentiating deductible from non-deductible legal costs.
Legal fees incurred for personal matters are typically not deductible. This includes expenses for personal injury cases, divorce or child custody disputes, residential real estate transactions, estate planning, or criminal charges stemming from personal issues. Even if a personal legal issue indirectly affects a business, the associated legal fees usually remain non-deductible because their origin is personal, not business-related.
Some legal fees might be considered capital expenditures rather than immediate deductions. This occurs when the legal fees are part of the cost of acquiring, defending, or improving property, or establishing title to an asset. For instance, legal fees paid to defend a challenge to the title of a rental property or for patent applications must be capitalized, meaning they are added to the asset’s basis and recovered over time through amortization or depreciation, rather than being fully deducted in the year incurred.
Prior to the TCJA, individuals could sometimes deduct certain personal legal expenses as miscellaneous itemized deductions, subject to a 2% adjusted gross income (AGI) floor. However, the TCJA suspended most miscellaneous itemized deductions for tax years 2018 through 2025, which includes many personal legal fees that were previously partially deductible. This change means that for most individual taxpayers, legal fees for personal income tax advice or preparation are no longer deductible.
Common Scenarios for Deductible Legal Fees
Legal fees for business operations are generally deductible. This includes costs for contract negotiations, defending against lawsuits, resolving employee disputes, or protecting intellectual property like trademarks and copyrights. For example, attorney fees incurred while defending a business in a breach of contract claim or for collecting past-due business debts are deductible.
Legal fees for the production or collection of taxable income can also be deductible. This applies if there is a reasonably close connection between the legal expense and the income-producing activity. For instance, legal fees paid to collect past-due rent from an investment property are generally deductible as they relate to income from that property.
Legal fees associated with tax advice or representation before the IRS are deductible. This includes fees paid to a tax attorney for advice on tax planning specific to a business or for representation during an IRS audit or tax court proceeding.
Legal fees related to managing, conserving, or maintaining income-producing property, such as rental properties, are often deductible. This includes legal expenses for drafting lease agreements or handling tenant evictions.
Claiming Legal Fee Deductions
Accurately reporting deductible legal fees on tax forms requires understanding where different types of expenses are categorized. For self-employed individuals or sole proprietors, legal fees directly related to business operations are reported on Schedule C (Form 1040), Profit or Loss from Business. This schedule is used to detail income and expenses from a business activity.
Legal expenses incurred in connection with rental real estate activities are reported on Schedule E (Form 1040), Supplemental Income and Loss. This form is specifically for reporting income and expenses from rental properties, royalties, and certain other passive income sources. Similarly, farmers report legal expenses related to farming operations on Schedule F (Form 1040), Profit or Loss From Farming.
Maintaining meticulous records is essential to substantiate any legal fee deduction. Taxpayers should keep detailed invoices from their attorney that clearly itemize the nature of services, receipts for payments, and correspondence clarifying the purpose. If a single legal bill covers both deductible and non-deductible matters, ask the attorney to separate these charges. The specific form or schedule used for reporting the deduction depends on whether the legal service was for business, investment, or personal purposes.