Is the Cost of Tax Preparation Deductible?
Are your tax preparation fees deductible? Explore current IRS rules differentiating individual and business eligibility for this common expense.
Tax preparation costs are a common expense for many individuals and businesses. Taxpayers often wonder if these fees can reduce their overall tax obligation. Understanding the current rules for deducting tax preparation expenses is important, as deductibility varies significantly based on taxpayer type and income.
Deductibility for Individual Taxpayers
For most individual taxpayers, the ability to deduct tax preparation fees has changed significantly. The Tax Cuts and Jobs Act (TCJA) of 2017 suspended miscellaneous itemized deductions subject to the 2% adjusted gross income (AGI) limit for tax years 2018 through 2025. This category previously included unreimbursed employee expenses, investment expenses, and tax preparation fees. Therefore, individual taxpayers generally cannot deduct the costs associated with preparing their personal federal income tax returns, such as Form 1040.
Before the TCJA, these fees could be itemized on Schedule A (Form 1040) if they, along with other miscellaneous deductions, exceeded 2% of the taxpayer’s AGI. This specific deduction is unavailable for current tax years. While there might be very narrow exceptions for expenses related to the determination, collection, or refund of any tax, these typically do not apply to general personal tax preparation. W-2 employees with no self-employment income cannot deduct these fees.
Deductibility for Businesses and Self-Employed
Tax preparation fees incurred by businesses and self-employed individuals are generally treated differently. These costs are considered ordinary and necessary business expenses, making them deductible. This applies to fees paid for preparing business tax forms, resolving business tax issues with the IRS, or using tax software specifically for business returns.
Sole proprietors report these expenses on Schedule C of Form 1040. Owners of rental properties and those with royalty income use Schedule E, while farmers use Schedule F. Business entities like partnerships (Form 1065) or corporations (Form 1120) deduct these fees on their respective business tax returns.
Only the portion of the fee directly related to the business or income-producing activity is deductible. This means personal tax preparation costs are not deductible even if prepared by the same professional.
Claiming Deductible Tax Preparation Expenses
When tax preparation expenses are deductible, the method of claiming them depends on the type of income or business activity. Sole proprietors report these fees as a business expense on Line 17 (Legal and professional services) of Schedule C (Form 1040).
For rental property owners or individuals with royalty income, tax preparation expenses related to those activities are claimed on Schedule E (Form 1040). Farmers report these costs as “other expenses” on Line 32 of Schedule F (Form 1040). For other business entities, these costs are reported directly on their respective business income tax returns, such as Form 1120 for corporations or Form 1065 for partnerships. Taxpayers should maintain accurate records to substantiate any claimed deductions.