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Are Legal Expenses Tax Deductible?

Wednesday, August 26, 2009

Related Tags: expenses | tax | fees | deductible | business

Instructions

Legal Expenses for a Business

Step 1:
Generally speaking, all of the legal expenses that you incur connected with your ownership or operation of a business enterprise are fully deductible. This includes legal fees incurred in establishing your business, legal fees associated with maintaining your business operations and those legal expenses that arise out of any legal dispute or action involving your business enterprise.

Because the ownership and operation of your business is directed towards an income- or revenue-generating purpose, it is presumed that any legal expense incurred is tax deductible. The legal expenses themselves are incurred in order to benefit the operations of the business enterprise itself and are a legitimate business expense.

Legal Expenses for Estate Planning

Step 1:
You may be able to deduct at least a portion of legal expenses that you incur for estate planning. If part of your estate planning efforts is designed to address issues relating to a business---including business continuity planning---you can deduct part of your legal fees.

Even when you are dealing with business matters through estate planning, there normally will be a personal element to that process as well. Therefore, it is important that you specifically itemize the expenses that you incur for estate planning so that any deductions you claim appropriately will be supported with documentation from your attorney.

Legal Expenses for Divorce

Step 1:
Overall, legal expenses associated with a divorce case---as well as related causes of action like child custody cases---are not tax deductible. There are a number of reasons why these fees are not tax deductible, including the reality that these are personal expenses and that this money is not being expended for a true income-producing purpose.

There are some limited instances in which you can obtain a tax deduction for legal fees expended in regard to matters relating to a divorce case. For example, if you are attempting to collect past due maintenance payments that are owed to you or child support payments owed to your child, you legitimately can claim a tax deduction for these expenses. Request that your attorney specifically itemize the time spent on an activity like collecting past-due maintenance so that you have an appropriate record to use to support your claimed deduction.

Legal Expenses for Criminal Case

Step 1:
If you are facing criminal prosecution, even criminal prosecution arising from your operation of a business, the legal expenses that you incur as a consequence are never tax deductible. Even if you ultimately prevail in your case, these legal fees cannot be written off.

There is a general public policy contained in the Internal Revenue Code that prohibits the deduction of expenses that arise from an individual undertaking a defense in a criminal action.

There is an exception to this general prohibition. In some instances a business enterprise itself is charged with a crime. If you are an owner or officer of such an enterprise and are not personally charged with a crime, you nonetheless will incur legal expenses. In such a circumstance, the legal fees you rack up will be tax deductible.

Reasonable Fees

Step 1:
When legal fees are being claimed as a tax deduction, the expenses themselves must be "reasonable." Admittedly, the reasonableness standard is by its very definition somewhat vague. However, in applying the reasonable attorney or legal expense standard, an examination is made of the prevailing, customary fees assessed in a specific community for the type of legal service or services at issue. Therefore, in order for legal expenses to be deductible completely they must be at a rate consistent with what is being charged on average in the particular community where the taxpayer seeking the deduction is located.

Warning

Step 1:
Because the issue of the tax deductibility of legal expenses is not always a matter of black-and-white legal interpretation, you are best served by seeking professional advice and assistance in this regard. You need to consider engaging the services of an experienced and qualified tax professional---a tax attorney or tax accountant that can assist you in determining the deductibility of particular legal expenses and fees.