Anyone who hires a lawyer is more likely than not going to incur attorney fees. The reason why the lawyer is hired however, be it for a child custody case or to write a patent, will affect the treatment of these expenses. This is because not all attorney fees are treated equally, as some of them are tax deductible while others are not. If you have incurred legal fees throughout the year, continue reading to see if you are eligible for tax deductions.
Attorney fees refer to the amount of money billed to a client for performing legal services. This includes all costs associated with hiring a lawyer, such as court fees, the lawyer’s fees, and travel expenses incurred in relation to the case. This can become a large expense and it is important to save any and all receipts from your attorney in order to prove the deduction in the rare case of an audit.
In general, attorney fees are deductible when incurred relating to profit or loss for a business. For example, the cost of hiring a lawyer to defend a patent or negotiate a contract is a deductible attorney fee, since these expenses are ordinary and necessary for the production of income. One major caveat to this rule involves legal fees paid to acquire business assets. These costs are added to the basis of the property, not deducted. It is also important to note that legal fees are deductible, even when the case is lost. Where this deduction is claimed, however, depends on the nature of the business. Expenses that are ordinary and necessary to operating a business should be reported on Schedule C while expenses that are ordinary and necessary to producing rental and royalty income should go on Schedule E of the individual’s 1040. Furthermore, deductible legal fees related to farm income and expenses should be reported on Schedule F of the 1040.
On the other hand, we have attorney fees associated with personal matters. These expenditures, such as divorce or custody of children, are not deductible since they are not ordinary and necessary business expenses. Even attorney fees resulting from a personal injury lawsuit or wrongful death are nondeductible, however the winnings are free from tax. In years prior, attorney fees related to personal matters qualified as a miscellaneous itemized deduction and could be claimed on the individual’s personal tax return. However, this has been suspended by the Tax Cuts and Jobs Act of 2017 through 2026. In the event where attorney fees include both business and personal charges, the business portion still qualifies for a deduction. The amount can be determined by multiplying the total amount billed by the percentage of which the service charge was for business purposes.
If you have any questions or concerns about your ability to deduct attorney fees, the tax professionals at ADKF can help you.