Are Legal Fees Tax Deductible (All You Need To Know)

Wondering if Legal Fees Are Tax Deductible?

Are Legal Fees Tax Deductible for individuals and businesses?

What’s important to know about it?

Keep reading as we have gathered exactly the information that you need!

Let me explain to you if legal fees are tax deductible once and for all!

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Are Legal Fees Tax Deductible

Many wonder whether or not legal fees can be deducted from their income.

The question is: are legal fees tax deductible in any way?

Although you will need to consult with a tax professional to determine if you are eligible for tax credits or if you can deduct your legal fees, in this article, I will provide a general overview of the topic.

In fact, in some situations, legal fees are not deductible for tax purposes while in other cases they can be deducted.

Not Deductible Legal Fees

In the United States, legal fees that are incurred for personal matters are generally not deductible.

For example, if you had to pay legal fees or incurred legal costs related to a divorce, child custody, child support, personal injury, or damages to your property, your legal fees will not be deductible

Furthermore, any legal fees that you pay related to a non-business tax issue, tax advice, or in connection with the determination, collection, or refund of your taxes will also not be tax deductible.

Deductible Legal Fees

If you are operating a business or incur legal fees in the context of business activities, those fees are generally deductible for tax purposes.

For example, if a company incurred legal fees relating to a business transaction, for the rental of property, to earn royalties, or obtain tax advice, such legal fees are deductible from the company’s income.

Other types of legal fees can also be deducted such as legal fees related to farm income and expenses, whistleblower claims, or unlawful discrimination claims.

Recommended article: What is a tax assessment 

Legal Fees Tax Deductibility FAQ

Are there personal legal fees that you can deduct?

Most personal legal fees are not deductible, although there are a few exceptions.

One exception is legal fees incurred in the context of employment discrimination cases where the taxpayer was the plaintiff.

Another scenario where personal legal fees may be deducted is when you are eligible to receive a whistleblower reward.

What are examples of business legal fees that can be deducted?

In most cases, legal fees incurred in the context of a business operation or activity are tax deductible.

Here are some examples of tax-deductible legal fees:

• Fees paid to collect unpaid account receivables
• Fees paid to negotiate and close a contract
• Fees paid to obtain legal advice on new markets
• Fees paid in the context of business litigation
• Fees paid to obtain copyrights, trademarks, or patent 
• Fees paid to purchase property or assets 

When can you deduct legal fees?

Generally, you should deduct the legal fees incurred in the tax year where the charges were incurred.

For example, if you incurred legal fees to draft, negotiate, and close a contract for a company this year, you will need to deduct the legal fees for this tax year.

Make sure you consult with a tax professional so you deduct the right amount from your income and make sure that you do not miss any deadlines.

Recommended article: What is a tax abatement 

Takeaways 

So there you have it folks!

Are legal fees tax deductible in any way?

In a nutshell, most personal legal fees are not tax deductible (with certain exceptions) and most business legal fees are tax deductible.

A person incurring legal fees for a personal tax issue, to sue someone for personal reasons, or deal with personal injury lawsuits, estate matters, or other personal legal actions, the legal fees paid are not tax deductible.

On the other hand, companies that pay legal fees to negotiate and close contracts, obtain legal advice in other jurisdictions, get tax advice, engage in mergers and acquisitions, or for any other business activity can deduct their legal fees.

If you’re looking to see whether or not you can deduct your legal fees, it’s important that you consult with a tax attorney or tax professional so you can get the right advice.

Now that you have a better understanding of whether or not legal fees are tax-deductible, good luck with your research!

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