Legal fees are not specifically stated to be tax deductible, but tax deductible legal fees are possible, depending on the context in which the fees are accrued. Sometimes provisions are absent in parts of the Code, which make one able to, with a skilled lawyer, deduct legal fees. Deductibility of legal fees is contingent upon the uniquer facts of a case and the tax payers ability to meet the necessary legal requirements for tax deductible legal fees.
There are some very simple criteria one must meet in order to know whether or not their legal fees are, in fact, deductible. One may dock legal expenses if they are…
1. obtained on behalf of a trade or business. Although the Code for deducting legal fees does not definitively qualify the terms “trade or business,” there are hundreds of examples of cases which have used the terms loosely in different interpretation. One aspect that is highlighted, however, is that the taxpayer must be active on a regular business with their “trade or business.”
2. Both “ordinary and necessary.” Once again, Code regarding tax deductible legal fees does not lay out exactly what it means for a relationship with a firm to be ordinary and necessary, but this standard is typically not difficult to meet, since the tax payer usually has perfectly sound reasons for dealing with a business.
3. Of a resonable amount. This is another rather vague qualification for tax deductible legal fees. The law states, however, that the amount incurred, “must be reasonable in amount and must bear a reasonable and proximate relation to the production or collection of taxable income or to the management, conservation, or maintenance of property held for the production of income.”
4. Either incurred or paid in the tax year which the individual wishes to render their legal fees deductible. This is pretty straightforward. If a tax payer wishes to receive tax deductible legal fees, that individual must have paid them in the same tax year he or she wishes to deduct them.
5. Paid for by the person that seeks to deduct the fees. For example, a corporation that wishes to receive tax deductible legal fees must have incurred the fees for the benefit of the corporation itself (since a corporation is an individual before the court). The corporation cannot get tax deductible legal fees on amounts which were used to benefit its stockholders, though the stockholders may inevitably benefit from the deduction, the case cannot be regarding stockholders or a specific share holder in order to find the legal fees tax deductible.
