Consulting an attorney can be costly, but you may be able to recoup some of those costs by deducting legal fees from your small-business taxes.
The Internal Revenue Service code does not specifically list legal fees as a deductible item. However, the tax code may allow you to deduct legal fees as an ordinary business expense, depending on how you used the legal services that you paid for.
Here are five common legal services for which you can generally deduct legal fees as a business expense:
- Starting up your business. Special tax rules apply for start-up costs. If you paid legal fees to form a partnership or corporation, up to $5,000 can be deducted upfront, according to the American Express OPEN Forum blog. In general, costs above $5,000 can be deducted if prorated over 180 months. But a taxpayer cannot claim an upfront deduction for legal fees over $55,000.
- Contracts. If you paid legal fees to create or review a business contract or agreement, you can probably deduct those fees as a business expense. Same goes for legal fees involved in suing for breach of contract, or defending any contract claims in court.
- Employee claims. If your small business paid legal fees to fight a lawsuit brought by an employee or ex-employee, that can probably be considered a business expense. This is allowed for wrongful discharge claims, for example -- but not if the employee is suing you personally for a matter unrelated to your business.
- Assisting in collections. If you paid a lawyer to help your business collect on unpaid bills, those legal fees can probably be deducted as a business expense.
- Tax advice and counsel. If you paid for business-related tax advice, you can probably deduct those legal fees as well. This also includes hiring a lawyer to defend your small business against IRS and state tax actions.
Of course tax law is complicated, and context is the key to deducting business expenses. You may want to consult a tax attorney about your best options as a small business owner -- keeping in mind, you can likely deduct those legal fees from your 2012 taxes.
- The Only Good Legal Fees Are Tax Deductible Legal Fees (Forbes)
- Deducting Business Expenses (Internal Revenue Service)
- Browse Tax Lawyers by Location (FindLaw)
- 2011 1099 Forms, Plus New Form 1099-K, Due This Month (FindLaw's Free Enterprise)