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 looking for ways to reduce your tax bill. One way to do that is by claiming tax deductions.

‍

Chances are, legal fees are a part of those business expenses. Many costs are tax-deductible, whether you hired a lawyer to help form your business, incurred legal fees during a court case, or paid a legal settlement.

‍

In this article, we’ll guide you through the specifics of tax-deductible legal expenses and provide some tips for streamlining the process of tracking your expenses to help you maximize your tax 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 partially for your personal legal services.

What expenses 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 formation: If you incurred legal fees to set up your business entity and draft your operating agreement or articles of incorporation, these expenses are tax-deductible. 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.
• 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 attorney 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. Legal fees related to personal matters, even if they indirectly affect your business, are typically not deductible. For example, if you're involved in a divorce or custody dispute, hire an attorney to draft a will or create a trust for your family, or get advice from a lawyer while buying a home, these legal fees are personal in nature and not deductible.

‍

You also can't deduct legal fees to defend against civil action or criminal charges arising 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 temporarily eliminated most miscellaneous itemized deductions, so those legal fees are no longer deductible.

‍

However, these deductions will be allowed again in the 2026 tax year, assuming Congress doesn't change the tax code before then. You can find more information on miscellaneous itemized deductions for individual taxpayers in IRS Publication 529.

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 recordkeeping system 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

‍

Having complete and accurate documentation for all your expenses ensures you're prepared to support your tax deductions in case the IRS or another tax authority audits you.

‍

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 ensure your business minimizes taxable income and maintains 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 can help 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.