Take Professional-Fee Deductions With Care

Can you deduct fees paid to your lawyer or CPA?

Sometimes yes, sometimes no, but often the answer isn’t even that definitive.

Fees paid to such professionals are deductible if they relate to your trade or business. But they’re not deductible if they are personal in nature. Somewhere between these black-and-white guidelines lie many hues of gray.

In addition to trade or business expenses, fees paid to lawyers and CPAs are deductible if they’re incurred in producing or collecting income or managing, conserving or maintaining investment property.

Correspondingly, professional fees are deductible if incurred for the preparation of a federal tax return, or for matters related to the audit of a tax return by the IRS or the collection of a tax refund. Two questions must be asked regarding the deductibility of a professional fee:

Is the expense deductible?

If it is, where should it be claimed on the tax return? Fees related to a trade or business are deducted on Schedule C along with all other business expenses. Fees related to rental property should be deducted on Schedule E.

However, expenses incurred in connection with the preparation of a federal income tax return (Form 1040) are normally claimed as a “miscellaneous itemized deduction.”

Unfortunately, miscellaneous deductions are deductible only to the extent that they exceed 2 percent of adjusted gross income (AGI).

Legal fees relating to a divorce often fall into the gray area of uncertainty.

To the extent that such fees are incurred for tax advice they are deductible. However, if they relate to the divorce itself or to child-custody issues, they’re regarded as a nondeductible personal expenses.

A suggestion: Have your attorney itemize the bill, clearly indicating how much of the fee is for tax advice. Without itemization backing up your deduction will be nearly impossible.

Deductible professional fees also include reasonable administrative expenses for an estate or trust, as well as fees paid for legal advice on investments, and protection of stock holdings.