Legal expenses: what's tax-deductible for businesses?

The IRS collects nearly $457 billion in income taxes from businesses each year. As a smart business owner, you're always on the lookout for ways to reduce your tax bill. One way to do that is by maximizing your tax deductions.

One common category of business expenses is legal and professional fees. But are legal fees tax deductible? As it turns out, whether you hire a lawyer to help form your business, incur legal fees during a court case, or pay out a legal settlement, many of these costs are tax-deductible.

In this article, we guide you through the specifics of tax-deductible legal expenses and provide tips for streamlining the process of tracking expenses to find the most deductions and improve your bottom line.

Can legal expenses be deducted from taxes?

Yes, business legal fees are generally tax-deductible as long as the IRS considers them ordinary and necessary expenses directly related to the operation of the business.

Ordinary means that the business expense is common and accepted in your industry. Necessary expenses are helpful and appropriate for your business. Ordinary and necessary expenses also tie directly to the business’s income-producing activities. In other words, they can't be for your personal legal services.

Which legal fees are 100% deductible?

You can deduct several kinds of legal fees from your federal income tax return. Here are a few common examples:

Legal fees related to business start-up costs

If you incurred legal fees to set up your business entity and draft your operating agreement or articles of incorporation, these expenses are deductible business expenses. This could also include fees for registering your business in your state, setting up corporate bylaws and records, or hiring a tax professional.

However, you're limited to deducting $5,000 in business organizational expenses in the year you begin business. If your total organizational expenses are higher than that, you'll need to capitalize them (i.e., add them to the business assets shown on your balance sheet) and amortize them over 15 years.

If your business is an LLC, you can also write off some costs related that come before formal operation, including expenses from investigating the idea of creating a business and any necessary marketing or travel.

Other recurring or one-time tax-deductible legal fees

Once your business is up and running, there are a number of reason why you might incur legal and professional fees, including:

• Contractual legal services: Drafting, reviewing, and negotiating contracts with clients, vendors, employees, and other parties is a routine part of business operations. Legal fees paid to attorneys for these services are deductible.
• Employment-related legal fees: You can deduct legal costs associated with employment issues like drafting employee handbooks, handling disputes or unlawful discrimination lawsuits, and ensuring compliance with employment laws.
• Litigation costs: If your business is involved in a lawsuit, whether as a plaintiff or defendant, the legal fees incurred are usually tax-deductible. This includes attorney's fees to represent you in court, negotiate settlements, court costs, and other litigation-related expenses.
• Intellectual property protection: You can deduct legal fees for protecting intellectual property (IP), such as trademarks, patents, and copyrights. This includes the cost of filing applications, defending your IP rights, and resolving disputes.
• Regulatory compliance: You may need legal help to comply with various regulations, including environmental regulations, industry-specific laws, and data protection regulations. Fees paid to attorneys for compliance advice and services are tax-deductible.
• Tax planning and disputes: Legal fees paid for tax advice and representation in tax disputes are also deductible. This includes consulting with a tax attorney and defending your business in IRS audits or tax court.‍‍
• Real estate transactions: You might pay lawyer fees for real estate transactions like reviewing lease agreements or purchasing commercial property. These legal fees are deductible.

What legal fees aren't deductible?

While many legal fees are tax-deductible, not all legal fees qualify for a deduction. Personal legal fees, even if they indirectly affect your business, are typically not deductible.

Some common examples of legal or attorney fees that are non-deductible include:

• Divorce or custody disputes
• Residential real estate transactions
• Estate planning or drafting a will
• Creating a family trust
• Advice on buying a home
• Personal income tax preparation fees
• Non-employee immigration expenditures
• Defending against civil action or criminal charges from a political campaign or personal legal issues

Individuals used to be able to deduct legal fees related to earning or collecting taxable income as miscellaneous itemized deductions. The Tax Cuts and Jobs Act of 2017 eliminated most miscellaneous itemized deductions, so those legal fees are no longer deductible.

However, the law is set to expire in 2025, if Congress doesn’t pass an update, so they may be allowed again in the 2026 tax year. You can find more information on miscellaneous itemized deductions for individual taxpayers in IRS Publication 529.

You may have heard of the 2% rule, which was a limitation on certain deductions for unreimbursed job expenses, including some legal fees. This was also suspended via the Tax Cuts and Jobs Act of 2017. However, there may still be some deductions you can take on our state returns.

What documentation do you need to deduct business expenses?

Like any other business expense, you must keep records of your legal and other fees.

The IRS doesn't specify any particular kind of recordkeeping system. However, your documentation should include a summary of your business transactions and supporting documents, like paid bills, invoices, receipts, deposit slips, and canceled checks.

Supporting documents for deducting legal fees must include the following:

• Payee
• Amount paid
• Proof of payment
• Date incurred
• A description of the items or services provided showing the amount was business-related

Make sure you maintain complete and accurate documentation of all your expenses. That way, should you face tax audits from the IRS or another tax authority, you’re fully prepared to support all of your tax deductions, and hopefully avoid major headaches.

Most businesses use accounting software or apps to organize transactions and save digital copies of itemized receipts and other business expense documents. Pairing your accounting software with a business expense tracker like Ramp streamlines the process by automatically tracking and categorizing your legal fees and other business expenses. This automation reduces the need for manual entry and minimizes errors.

Leveraging these tools helps your business minimize taxable income and maintain an organized, accurate, and audit-ready financial management system.

Turn legal expenses into tax-saving opportunities with Ramp

Understanding what's deductible and keeping track of your tax-deductible legal expenses should be part of your overall business strategy. Ramp helps you maximize your tax benefits while complying with the tax code.

So, look at your current expense management practices. Are they working for you? Could technology save you time and optimize your approach? With Ramp's expense management software, managing your legal fees can become a streamlined and efficient part of your routine and ensure you have the right records if the IRS comes knocking.