By Adam D. Schmaelzle, Esq.
Let’s say you’re driving along the highway and you get a flat tire. You might find yourself in a situation where your car needs to be towed to a local shop, and you have to buy a new tire at that shops prices, right then and there. If your tire didn’t pop, you might have gone somewhere else. Shopped around a little. Maybe found a better rate. But unfortunately, you’re stuck footing the bill at those prices because you needed it immediately. That’s generally how it works when a person hires a lawyer. They’re stuck in some situation, they’re forced to hire a problem solver, and they end up spending a whole bunch of money by the end of the whole charade.
People need lawyers, but lawyers are expensive. It’s just that simple. Some say you get what you pay for, and some get away with establishing a long-standing relationship with an attorney and end up saving a few dollars along the way. But the reality is such that no matter who you are in this great country of ours, you are going to need some form of legal advice somewhere along the way. Luckily, some of those hefty legal expenses might be deductible on your taxes! Isn’t that refreshing news this time of year?
To be honest, it isn’t the easiest deduction to take because many legal fees are not deductible. It’s sort of a grey area of tax law. For instance, fees for personal legal services such as paying a criminal defense attorney are never deductible. But if the attorney was hired to help you with something related to the production of income (i.e. to help you figure out how much you need to pay back to the government) then it might be. A good rule of thumb to remember is this: “You can deduct legal fees related to doing or keeping your job”. I took that right out of the 2014 IRS handbook.
There is almost no good way to explain this, so Ill just give some examples of legal fees that can be deducted (in most circumstances).
Here are some examples:
- If you are hiring a lawyer to write a will, you can take a deduction ONLY for the portion of the will related to your business.
- Legal fees you accrued to sue someone for rent-owed can be deducted.
- Paying a lawyer to set up your corporation or partnership.
- Fees accrued by hiring a lawyer to create or review a business contract.
- Defending a lawsuit against an employee or bringing a lawsuit against an employer may be deductible.
- Hiring a lawyer for tax advice is deductible.
- The portion of legal fees related to the collection of alimony
Individuals who make their income collecting rents benefit the most from these deductions because the majority of their business revolves around collecting income. A good majority of litigation that property managers and landlords end up involved in can be deducted as an itemized miscellaneous deduction on their Schedule A on their 1040.If you own a business and need to hire a lawyer to collect money that is owed to you, those legal fees can be deductible. In most cases, attorneys will either charge a flat-fee or one-third the amount at disposition in these types of cases. Unfortunately for the business owner, in small-claims court these fees are assumed by the client and cannot be charged in addition to the court costs. Therefore, business owners can make up that amount at the end of the year on their taxes and cover a good portion of their costs.Personal legal advice is never tax deductible. Furthermore, if you take a legal expenses deduction it will likely fall under the itemized deduction, which means you will have to forfeit the standard deduction. That being said, remember that the rules are a little sticky, so you may want to consult with a lawyer before taking that deduction. Who knows, the consultation might end up being free.
If you have any questions, or feel as though a mistake was made, please feel free to contact Attorney Adam D. Schmaelzle at 774-314-9124.
IRS Miscellaneous Deductions