Let’s delve into when legal fees are deductible for individuals and for small businesses.
Most Personal Legal Fees Are Not Deductible
With a few exceptions, most legal expenses related to personal issues are not deductible. Many were were deductible prior to 2018, but the Tax Cuts and Jobs Act (TCJA) of 2017 changed tax law so that you may not deduct these types of fees. Specifically, you cannot deduct legal fees for:
DivorceChild custody casesBuying real estate for personal use, including title expensesBreach of a marriage proposalCivil or criminal charges related to personal relationshipsPersonal injuryEstate planningProperty claims or settlementsTax issues or adviceDefending yourself against civil or criminal charges stemming from your participation in a political campaign
Personal Legal Fees You Can Deduct
Taxpayers do still have a handful of personal legal fee deductions under current tax law. They include:
Legal fees in employment discrimination cases (where the you as the taxpayer are the plaintiff): The deduction is limited to the total amount of the your gross income.Whistleblower rewards: In certain cases where you report someone for breaking a federal regulation, such as tax fraud or evasion, you will be paid a percentage of the amount that was evaded if the person is caught. This deduction is limited to the amount you are paid.
Many Business Legal Fees Are Deductible
The other side of the coin for taxpayers who are running or starting a business is that many business-related legal fees are deductible on Schedule C (Schedule E for rental or royalties income and Schedule F for farm income). If you are a businessperson, the legal fees you can deduct must be related to the profit or loss from a business, include those pertaining to:
Collecting income from a customer (along with relevant court costs)Your business declaring bankruptcyHandling and caring for income-producing equipmentDefending your business or trade (but only those fees that directly relate to the business—not to an individual, such as the owner or an employee)Drafting or negotiating contracts between you and your customersDefending any patent, trademark, or copyright claims
