Are Legal Fees Deductible?
So many questions pop up all the time for small business owners, especially when it comes to taxes and determining what is and isn’t deductible. Naturally, we want to deduct as many legitimate business expenses as possible to lower our taxable income and lessen our tax burden. Sometimes, however, it can be hard to figure out which expenses are deductible in our specific industry.
For example, you might wonder if you can write off legal fees, particularly the ones you’ve paid while setting up your business. In this blog, we tackle this commonly asked question, putting it to rest once and for all.
The quick answer is yes. Legal fees that relate to a company's development and operation are considered legitimate business expenses, so they can indeed be deducted from your taxable income. (To clarify, we’re not talking about the amount you paid your lawyer to get you out of a traffic ticket. The fees must be business-related, not personal.)
In what instances might you find yourself paying an attorney as a small business owner? For one, you might hire a lawyer to help you pick the best legal structure for your business (sole proprietorship, LLC, etc.,) and to handle all the related paperwork when you first establish it.
Beyond this, small business owners also often hire attorneys to:
draft, negotiate, and review contracts, including partnership and client agreements, vendor and employment contracts, and leases
file copyrights, patents, or trademarks and defend the business against infringement
ensure the business stays in compliance with all relevant laws and regulations
advise on strategies to mitigate legal risk and potential liabilities
represent the business in negotiations, mediation, arbitration, or litigation
assist with matters related to hiring, firing, discrimination, harassment, employee contracts, wage and hour laws, and compliance with labor regulations
facilitate business transactions like mergers, acquisitions, asset purchases, and sales
As you can see, there are many different reasons why a small business might require the services of an attorney. This is especially true when it’s first established and in its early stages.
New business owners frequently forget to keep track of these legal expenses early on, though, because they don’t have an established bookkeeping system in place yet. As a result, they don’t accurately capture how much they spent in the beginning stages of their business and aren’t able to capitalize on those tax savings. Remembering to record these expenses, even when the business is brand-new, is half the battle.
A Final Word from Tuesday P. Brooks, Owner of AJOY
The moral of the story is that all small business owners, particularly when they’re just starting out, should keep legal expenses in mind. More specifically, they should keep detailed records of what they spend on attorney fees and legal filing fees (which are deductible as well). Do this, and when tax time rolls around, your fledgling (or well-established) business will definitely benefit, helping to set it up for sustainable, long-term success!
