What Legal Expenses Are Tax Deductible for Your Business?

Lauren WardUpdated May 17, 2023

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Are legal fees tax deductible for a business? Yes, many are. The general rule of thumb is that if the legal fee is related to your business in any way, it can likely be deducted on your taxes. Therefore, it’s important to keep detailed records of your legal expenses throughout the year because you may be able to write them off during tax season. Read on for a closer look at which legal fees are considered business tax deductions and which aren’t, plus tips on how to write off legal expenses when filing your taxes.

Can Legal Fees Be Deductible for a Business?

Generally, yes. The Internal Revenue Service (IRS) allows businesses to deduct legal and professional fees if they are "ordinary and necessary" expenses for the business. This typically includes fees for legal counsel, help forming your business, and fees incurred during a court case, even if you lost the case. As long as the legal fee relates to the daily operations of your business in some way, it is likely tax deductible. Recommended: 5 Small Business Tax Tips for Business Owners

Common Legal Fees That Are Deductible

You may be able to deduct the following business-related legal fees:

Attorney fees for filing and defending against lawsuits
Business bankruptcy legal expenses
Business incorporation expenses
Business planning expenses
Business tax fees
Commercial real estate closing expenses
Court costs and attorney fees revolving around the collection of taxable income
Drafting and reviewing contracts
Immigration expenses (for hiring and moving non U.S. residents to the U.S.)
Legal fees related to criminal charges against your business
Unlawful discrimination claims
Whistleblower claim

Recommended: 22 Small Business Tax Deductions for 2023

What Legal Fees Aren't Deductible?

Generally, any legal fees that aren’t related to your business are not tax deductible. This means that all of the following common legal fees cannot be deducted from your business income:

Divorce
Child custody
Personal injury
Estate planning/will preparation
Civil/criminal charges revolving around a political campaign
Civil/criminal charges revolving around any personal relationships outside of work
Legal fees related to the purchase of real estate for personal use
Nonbusiness tax advice
Fees related to collection, determination, or refund of taxes

How Much Can Be Deducted?

After the first year of business, the IRS does not list a specific amount that a business can deduct. The key thing to remember is that the legal fee or lawsuit expense must be related to your business. While anything relating to money can affect a small business owner’s ability to run and manage their company, the fees likely cannot be deducted if the lawsuit is not related to the company itself. There are, however, limitations on how much a startup can deduct — on legal and other expenses — during their first year of business (more on that below).

What Documentation is Required to Deduct Legal Fees?

In general, you want to save all documentation related to lawsuits and legal fees in case you are audited. Be sure that any invoices you receive from your attorneys clearly state the kind of the services that were provided. If the invoice you receive doesn't specify the type of legal advice or counsel, you’ll want to ask the attorney to provide a more detailed invoice. That way, you'll be able to substantiate any legal fees that you deduct on your taxes in the event of an audit. Your business structure determines how you should go about deducting legal fees on your tax return. If you’re a sole proprietor or single-member LLC, you’ll list these expenses in the "Expenses" section of your Schedule C. If your business is a partnership or multiple-member LLC, you’ll list them in the "Deductions" section of Form 1065. Corporations put these expenses in the "Deductions" section of Form 1120.If you have to amortize startup and organizational costs, you would include them in “Other Expenses” on your business tax return.Recommended: Here Long to Keep Business Tax Returns

Can You Deduct Legal Fees From an On-Going Lawsuit?

Typically, yes, but the lawsuit must directly relate to your business. For example, if there’s a contract dispute between your company and another company, any legal fees relating to the case would likely be deductible. Whether or not a legal fee is deductible as a business expense does not depend on the outcome of a lawsuit.

Can Small Businesses Deduct Start-Up Expenses?

Yes — up to a limit. If you started your business this year, any fees you paid to lawyers to help you incorporate or organize your business may be deductible. This includes fees for services performed by an attorney to help you file business registration documents with your state or prepare corporation bylaws, as well as partnership filing fees.Typically, you can deduct up to $5,000 in business organizational expenses the year you begin business. If your expenses were higher than that, then you will need to amortize any remaining amounts over 15 years.Legal fees aren’t the only costs that can be deducted as a start-up, however. You can also deduct up to $5,000 in startup expenses, which can include:

Market research expenses
Product research
Cost of searching for and securing an office or workspace
Advertising
Wages and salaries for training
Professional and consultant fees
Costs associated with acquiring an existing business
Costs of leasing a business property
Equipment costs

The Takeaway

Legal fees are often deductible, but the fees or lawsuit must relate to your business. To deduct legal fees, you’ll need to keep any and all paperwork you receive that relates to the legal matter. Should you be audited, you want to have extensive documentation that proves your deductions are legitimate. Also keep in mind that interest you pay on any small business financing is deductible as a business expense. If you’re thinking about using a loan to grow your business this year, Lantern by SoFi can help. With our online lending tool, you can access a range of different business loan options all in one place and receive an offer that is matched to your needs and qualifications.Find the right financing solution for your small business on Lantern's Marketplace.

Frequently Asked Questions

Can you deduct legal fees if a lawsuit is ongoing?

Can you deduct tax preparation fees?

Are LLC fees tax deductible?

Who qualifies for the 20% pass-through deduction?

What is the maximum deduction for a small business?

This article is not intended to be legal advice. Please consult an attorney for advice.Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Photo credit: iStock/PixelsEffect

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About the Author

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.

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