Can You Write Off Legal Fees on Your Taxes?

Understanding which expenses can reduce taxable income is key for taxpayers. Legal fees, incurred for various reasons, are a common area of inquiry. The ability to deduct legal fees is not universal and depends significantly on the specific nature of the legal matter and whether it is personal or business-related. Tax regulations outline distinct criteria for deductibility. This distinction is important, as personal legal costs are generally not deductible, while business-related legal expenses may qualify under certain conditions. Understanding these nuances is crucial for accurate tax planning.

Deductibility for Businesses

Businesses can generally deduct legal fees as ordinary and necessary business expenses. An expense is considered “ordinary” if it is common and accepted in the industry, and “necessary” if it is helpful and appropriate for the business’s operation. These expenses must directly support business operations and contribute to generating taxable income. Legal fees for defending business operations, such as litigation stemming from contract disputes or customer grievances, are typically deductible.

Other deductible business legal expenses include those related to collecting business income, drafting essential documents like contracts and agreements, and ensuring regulatory compliance. Businesses can also deduct fees paid for tax advice and representation during Internal Revenue Service (IRS) audits or tax court proceedings.

However, not all legal fees incurred by a business are immediately deductible. Some legal expenses must be capitalized, meaning they are added to the basis of an asset or amortized over time. This applies to fees related to acquiring or defending title to property, as these costs are considered part of the asset’s overall cost. Similarly, legal fees incurred for the organization of a new business, such as drafting partnership agreements or corporate bylaws, are generally capitalized and can be amortized over a period, often 180 months.

Deductibility for Individuals

The circumstances under which individuals can deduct legal fees are significantly more limited. Most legal fees incurred for personal matters are not deductible. For example, costs associated with personal injury lawsuits are generally not deductible because the damages received are often non-taxable.

There are, however, specific exceptions to this general rule. Legal fees related to certain whistleblower awards, such as those from the IRS, the Securities and Exchange Commission (SEC), or the Commodity Futures Trading Commission (CFTC), may be deductible. Similarly, legal fees for claims of unlawful discrimination or civil rights violations are deductible “above-the-line,” meaning they reduce gross income directly and do not require itemizing deductions. This deduction is limited to the amount of taxable income received from the judgment or settlement.

With the Tax Cuts and Jobs Act (TCJA) of 2017, miscellaneous itemized deductions, which previously included some investment-related legal fees and tax preparation fees, were suspended for tax years 2018 through 2025. This means that for most taxpayers during this period, personal legal fees related to income production or tax advice are no longer deductible. Legal fees paid by a self-employed individual or independent contractor, if directly related to their trade or business, would typically be reported as business expenses on Schedule C.

Non-Deductible Legal Fees

Many common types of legal fees are generally not deductible for either individuals or businesses. Legal fees incurred for purely personal matters are almost always nondeductible. This includes costs associated with divorce, separation, or child support, unless they are specifically related to the collection of taxable alimony from a pre-2019 divorce.

Fees for preparing wills, trusts, or other estate planning documents are also considered personal expenses and are not deductible. Similarly, defending a criminal charge is typically a personal expense, and the associated legal fees are not deductible unless the charges directly arise from a trade or business activity.

Legal fees that add to the basis of property or produce a long-term benefit are generally not deductible in the year incurred; instead, they must be capitalized. This includes costs for buying a home, defending title to property, or legal costs associated with property improvements. Legal fees related to generating tax-exempt income are also not deductible.

Claiming Deductions

Once a taxpayer determines that certain legal fees are deductible, the next step involves properly reporting them on the tax return. For businesses, the reporting location depends on the business structure:
Sole proprietors and single-member Limited Liability Companies (LLCs) typically report on Schedule C (Form 1040), Profit or Loss From Business.
Partnerships report on Form 1065, U.S. Return of Partnership Income.
Corporations use Form 1120, U.S. Corporation Income Tax Return.
Farmers report on Schedule F (Form 1040), Profit or Loss From Farming.

These expenses are usually listed under “Legal and Professional Services.” For individuals, “above-the-line” deductions, such as those for certain whistleblower awards or unlawful discrimination lawsuit fees, are reported on Schedule 1 (Form 1040), Additional Income and Adjustments to Income. Maintaining accurate and detailed records, including invoices and receipts that clearly describe the nature of the legal services received, is essential to support any claimed deductions in case of an IRS inquiry.