Are legal fees tax-deductible? A guide for businesses

The IRS collected over $565 billion in income taxes from businesses last year. As a smart business owner, you're always on the lookout for ways to reduce your tax bill by maximizing your deductions. One common business expense category is legal and professional fees. But are legal fees tax-deductible?

The short answer is that business-related legal fees are generally deductible, while personal legal fees usually aren’t. Knowing the difference can have a big impact on your tax planning, particularly after the Tax Cuts and Jobs Act (TCJA) changed how some deductions are handled.

Here, we clarify which legal expenses qualify for deductions, how to claim them, and the documentation you'll need.

Can you deduct legal fees from your taxes?

Business legal fees are generally tax-deductible. Like any other tax-deductible business expense, the IRS requires that they be ordinary and necessary to the operation of your 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.

So, as long as your legal expenses directly support business operations and contribute to generating taxable income, they’re tax-deductible. In contrast, personal legal fees are generally not deductible.

What legal expenses are 100% tax-deductible?

The IRS allows you to fully deduct legal fees related to business operations, including business lawsuits, settlements, disputes, tax issues, and other activities tied to producing taxable income. Here are the most common deductible legal expenses:

Business lawsuits and settlements

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 fees for defending your business in a lawsuit, such as a breach of contract claim or a customer dispute
• Settlement costs tied to resolving commercial disputes, provided they’re compensatory and not punitive

However, note that while fees associated with settlements are generally deductible, punitive damages, penalties, or government-imposed fines are not deductible under IRS rules.

Intellectual property protection

Legal fees paid to secure or protect your intellectual property are typically deductible, especially when tied directly to your business’s core operations. These include legal fees related to:

• Patent applications
• Defending an existing patent
• Trademark and copyright filings and disputes

However, note that legal fees incurred during the patent application process are treated as capital expenses. That means rather than deducting these fees immediately, you’d generally amortize them and write them off over 15 years.

Legal fees related to business startup 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. This also includes fees for registering your business, 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 exceed this limit, you'll need to capitalize and amortize them over 15 years.

Other recurring or one-time tax-deductible legal fees

There are a number of other reasons you might incur legal and professional fees. Legal expenses for the following business scenarios are also tax-deductible:

• 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
• 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 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.
• Whistleblower claims: If you file a whistleblower claim about federal tax violations or SEC regulations, the legal costs associated with this claim may be deductible
• Farm income and expenses: If you're in agriculture, legal fees related to land disputes or farm equipment agreements are deductible under Schedule F

What legal fees aren’t 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:

• Defending against civil action or criminal charges resulting from personal legal issues
• Personal injury cases
• 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 advice or preparation fees
• Non-employee immigration expenditures

How to deduct legal fees on your taxes

Follow these steps to claim tax-deductible legal fees and maximize your potential deductions:

1. Keep accurate records

The first step in claiming your legal expense deductions is to keep comprehensive records. For each legal service, ensure you document:

• Invoices detailing the nature of the services provided
• Receipts for payments made to your attorney or law firm
• Contracts or engagement letters that specify the business-related nature of the legal services
• Any email correspondence or other written agreements that clarify the purpose of the legal services

These documents substantiate your deductions in case of a business tax audit. The more organized your records are, the easier it will be to support your claims.

2. Use the correct IRS forms

Once you’ve properly tracked and documented your legal expenses, the next step is to report them correctly on the appropriate IRS forms. Make sure you select the correct form based on your business type:

• Schedule C (Form 1040): For self-employed individuals or sole proprietors, legal fees related to business operations are reported on this form
• Schedule E (Form 1040): If you're claiming legal expenses related to rental properties, use Schedule E to report those deductions
• Schedule F: Farmers should report legal expenses related to farming operations on Schedule F

3. Categorize legal fees correctly

Categorize your legal fees carefully to avoid confusion and errors. Remember that business-related legal fees are deductible, but personal legal fees are not.

Ask your attorney to itemize invoices, clearly indicating which services are related to business and which are personal. This will make it easier to separate your deductible expenses from the non-deductible ones.

4. Consult a tax professional

The rules surrounding legal fee deductions can be complex, especially when some expenses may involve both personal and business matters. If you're unsure about how to classify or deduct mixed-use legal fees, it’s a good idea to consult with a tax professional.

A tax advisor or CPA can:

• Guide you through the process of categorizing legal expenses correctly
• Help you navigate the impact of TCJA and the changes to deductions for personal legal fees
• File your tax return correctly, minimizing the risk of an audit and maximizing your deductions

5. Use expense management automation software

To make tracking legal fees easier, consider using automated expense management software like Ramp. Ramp automatically categorizes business expenses, including legal fees. This will:

• Reduce the likelihood of manual errors when reporting legal expenses
• Save you time during tax season, as all your legal expenses will be categorized and easily accessible
• Help you monitor your taxable income and ensure you’re maximizing your tax refund by claiming every deductible expense

How TCJA changed deductions for legal expenses

The Tax Cuts and Jobs Act of 2017 significantly altered U.S. tax law. The changes primarily impacted personal legal expenses, while business-related legal fees remained largely unchanged. Here are the key changes:

Personal legal fees

Before the TCJA, individuals could claim personal legal expenses, such as those for divorce, estate planning, and personal injury, as miscellaneous itemized deductions if those expenses exceeded 2% of their adjusted gross income (AGI).

These were part of the miscellaneous deductions category, which also included items like investment expenses and tax preparation fees. TCJA eliminated these as part of its broader changes to the itemized deductions framework.

With the suspension of these miscellaneous itemized deductions, personal legal fees—even if they contribute to taxable income—aren’t deductible for most individuals.

Key takeaway: If you’re an individual looking to claim personal legal fees, you’ll no longer be able to deduct these under the TCJA, even if the fees were previously allowed.

Business legal fees

Business-related legal fees remain fully deductible under the TCJA, just as they were before. Legal fees related to business operations, such as contract negotiations, employment disputes, tax advice, and litigation costs, continue to be valid business tax deductions.

This provides ongoing tax-saving opportunities, allowing you to claim deductions on legal expenses tied to maintaining or growing your business. Whether you’re defending a lawsuit, seeking tax advice, or negotiating with suppliers, the legal costs associated with these activities are still deductible as long as they relate to business operations.

Key takeaway: Business legal fees remain deductible, offering businesses continued opportunities to reduce taxable income by deducting legal expenses related to business activities.

Here’s a summary of the primary changes in legal fee deductions following the TCJA, highlighting the key differences between personal and business-related legal fees:

Turn legal expenses into tax savings 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.

Ramp’s expense management software tracks all your expenses automatically, categorizing them for tax purposes and helping you capture every deductible expense. Ramp transforms your legal expense management from a cumbersome task into a strategic asset, ensuring you have the right records if the IRS comes knocking.

Try an interactive demo and see why companies that use Ramp save an average of 5% a year across all spending.