Written by Marcia Geltman, CPA, Partner, Nisivoccia LLP
What sometimes seems like an easy answer, doesn’t always turn out that way. Some fees are deductible. Some fees must meet certain thresholds and some fees must be amortized over a period of years.
For instance, tax preparation fees are deductible. If they are related to a business, they are deductible in full. If they are for preparation of a personal income tax return, they are deductible as a miscellaneous itemized deduction. To get the benefit of miscellaneous itemized deductions, the total amount of miscellaneous itemized deductions must exceed 2% of adjusted gross income (AGI is generally the bottom number on page 1 of the tax return). Even if they exceed the 2% threshold, people electing to take a standard deduction versus itemized deductions, will not get the benefit of the tax preparation fee deduction.
Legal fees incurred in preparing a will are not deductible. However, if any part of the fee relates to tax planning, and the legal bill allocates the cost between will preparation and tax planning, the tax planning portion of the bill would be deductible but subject to the same 2% limitation discussed above.
When starting a new business, legal fees are often incurred to form an entity or to investigate potential purchases. These can be treated as either start-up costs or organizational expenses. The IRS allows a deduction in the first year of business for up to $5,000 of organizational expenses and a similar deduction for start-up costs. (There is a reduction of the $5,000 if the total costs exceed $50,000.) The excess over $5,000 must be amortized over 180 months (5 years).
If an existing business incurs legal fees to negotiate a lease or contract or to purchase an asset or business, the fees are amortized over the life of the lease, contract or asset, with no upfront deduction.
The final answer as to whether legal and accounting fees are deductible is: Yes, no, sometimes and maybe.
If you need help determining whether your legal and accounting fees are deductible, please feel free to give me a call at (973) 328-1825 or email me at firstname.lastname@example.org.