Can You Write Off the Cost of Tax Preparation?

The question of whether tax preparation costs can be written off is a common concern for many taxpayers. Understanding the rules surrounding these deductions can help individuals and businesses manage their tax obligations more effectively. The ability to deduct these expenses often depends on the type of taxpayer and the nature of the income involved. This guide explores the circumstances under which these fees may be deductible and how to report them.

Individual Taxpayer Deductions

For most individual taxpayers, the ability to deduct tax preparation fees has been suspended. The Tax Cuts and Jobs Act (TCJA), enacted in 2017, eliminated miscellaneous itemized deductions subject to the 2% adjusted gross income (AGI) limit for tax years 2018 through 2025. This suspension includes the cost of preparing federal and state income tax returns.

Consequently, fees paid to tax preparers, the cost of tax software, and e-filing fees for personal income tax returns are not deductible for these tax years. This applies to individuals who primarily earn W-2 wages and do not have self-employment income or other specific income-generating activities. Even if a taxpayer itemizes deductions on Schedule A, personal tax preparation fees cannot be included during this period.

The TCJA significantly increased the standard deduction, which reduced the number of taxpayers who itemize. While the increased standard deduction may benefit some taxpayers, it means that the specific expense of personal tax preparation is no longer a direct write-off.

Business and Other Entity Deductions

While personal tax preparation fees are not deductible for individuals, the rules are different for businesses and certain other entities. Businesses can deduct tax preparation fees as ordinary and necessary business expenses. This applies to various business structures, including sole proprietorships, partnerships, S corporations, and C corporations.

For self-employed individuals operating as sole proprietors, tax preparation fees related to their business are deductible. These expenses are reported on Schedule C, Profit or Loss From Business. Similarly, costs associated with preparing tax returns for partnerships (Form 1065), S corporations (Form 1120-S), and C corporations (Form 1120) are also deductible business expenses.

Tax preparation costs related to rental property income reported on Schedule E, Supplemental Income and Loss, are also deductible. This includes fees for preparing the income and expense statements for rental properties. Farmers can deduct tax preparation fees associated with their farm income and expenses, which are reported on Schedule F, Profit or Loss From Farming.

The deductible costs encompass fees paid to tax professionals, the business portion of tax software, and e-filing fees for business-related returns. If a tax preparer handles both personal and business taxes, only the portion of the fee directly attributable to the business or income-producing activity can be deducted. This requires an allocation of the total fee to ensure proper reporting.

Trusts and estates may also deduct tax preparation fees. These fees are administrative expenses for managing the trust or estate. Unlike individual miscellaneous itemized deductions, certain administrative expenses of estates and non-grantor trusts, including tax preparation fees, are not subject to the 2% AGI limitation.

Reporting Deductible Expenses

When tax preparation expenses are deductible, they must be reported on the appropriate tax forms. For sole proprietors, these fees are reported on Schedule C, Profit or Loss From Business. The expense is entered on Line 17, “Legal and professional services,” or Line 27a for “Other expenses.”

Individuals with rental property income report their deductible tax preparation fees on Schedule E, Supplemental Income and Loss. These fees are entered on Line 10, designated for “Taxes.” For farmers, tax preparation expenses are reported on Schedule F, Profit or Loss From Farming, under “Other expenses” on Line 32.

Corporations report tax preparation fees as an ordinary business expense on their respective income tax returns. C corporations use Form 1120, U.S. Corporation Income Tax Return, and S corporations use Form 1120-S, U.S. Income Tax Return for an S Corporation. Partnerships report these expenses on Form 1065, U.S. Return of Partnership Income. They are found within the “Deductions” section, under “Legal and accounting” or “Other deductions.”

Trusts and estates report their deductible tax preparation fees on Form 1041, U.S. Income Tax Return for Estates and Trusts. These administrative expenses are listed on Line 15, “Fiduciary fees,” or other expense lines. Accurate record-keeping is important to substantiate these deductions.