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Legal expenses: what's tax-deductible for businesses?
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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.
FAQs
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- Balances do not carry over, so you must pay them by the end of each month
- Your business must be incorporated to qualify for a card
- You need at least $50,000 in a business bank account to qualify
- Average net savings of 5% due to cost-reducing features
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- Access more than $350,000 in deals from various partner
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- View vendor information and pricing on a single dashboard
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- No personal guarantee or credit check required
- Must be a registered business to qualify
- Must have most of your business spend in the US
- The Ramp Card is ideal for incorporated businesses
- Comes with automated expense management tools
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- Best for businesses aiming to streamline financial operations and enhance savings
- Offers 5% net savings on average through expense-cutting features
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- Integration with accounting platforms including NetSuite, Quickbooks, and Xero
- Offers AI-powered cost-saving insights
- Unlimited physical and virtual employee cards
- Not available to sole proprietors or unregistered small businesses
- Requires $50,000 in a business bank account to qualify
Card Details
The Ramp Card is an innovative corporate card, particularly suited for LLCs, that combines automated expense management features with cashback rewards. It offers detailed spending insights with AI-powered recommendations for cutting costs, and integrates seamlessly with accounting software to simplify financial tracking and reporting. Cards come with no annual fees, foreign transaction fees, or card replacement fees. Ramp is an excellent choice for businesses that want to streamline their financial operations while saving money.
Pros
- Cashback rewards
- No personal guarantee or credit check required for eligibility
- Automated expense management features like spending limits and receipt-matching
- Integration with accounting platforms including NetSuite, Quickbooks, and Xero
- Offers AI-powered cost-saving insights
- Unlimited physical and virtual employee cards
Cons
- Primarily focused on cost-cutting, which might not suit all business needs
- Geared mainly towards U.S. businesses, which may limit its appeal for international transactions
Ramp’s charge card program comes with the additional perk of tools designed to help your business track and reduce its spending.
- No personal guarantee
- No annual fee
- Valuable cash back
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- Unlimited physical and virtual employee cards with custom limits
- Not available to sole proprietors
- Must have $50,000 in liquid assets
- Unlimited free virtual and physical employee cards
- Cashback rewards on purchases
- Customizable spending limits for employees
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- Connects with accounting systems like QuickBooks and NetSuite
- Automates bill payments and invoice processing
- Provides a comprehensive audit trail and expert support for negotiations
- Unlimited virtual cards
- Real-time expense tracking
- Integration with accounting software
- Automated bill payments and invoice processing
- Requires full balance payments monthly
- Limited to businesses with most of their operations in the U.S.
- Corporate card and spend management platform
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- Cashback rewards on all purchases with no fees
- Built-in fraud protection ensures that your organization's finances are always secure
- Offers an average savings of 5% by identifying cost-saving opportunities
- No annual fees or interest
- Custom spend and vendor controls
- High credit limits
- Automatic receipt matching and expense categorization
- Not available to sole proprietors
- As a corporate charge card, balance can't be carried monthly
- Must have $50,000 in a business bank account to qualify
- Corporate card and spend management platform
- Unlimited employee cards with custom spending limits
- Cashback rewards on purchases
- Offers an average savings of 5% by identifying cost-saving opportunities
- Assists with software price negiotations
- No annual fees or interest
- Custom spend and vendor controls
- High credit limits
- Automatic receipt matching and expense categorization
- Not available to sole proprietors
- As a corporate charge card, balance can't be carried monthly
- Must have $50,000 in a business bank account to qualify
- Corporate card and spend management platform
- Cashback rewards on purchases
- Unlimited employee cards with custom spending limits
- Accounts payable software
- Uses business revenue to determine eligibility and credit limit
- No annual fees or interest
- Custom spend and vendor controls
- High credit limits
- Automatic receipt matching and expense categorization
- Only available to corporations, LLCs, and LPs
- As a charge card, balance can't be carried monthly
- Must have $50,000 in a business bank account to qualify
- Corporate card and spend management platform
- Cashback rewards on purchases
- Unlimited employee cards with custom spending limits
- Automated receipt matching
- Accounts payable software
- Must have $50,000 in a business bank account to qualify
- Balance must be paid in full each month
- Integrates with accounting platforms like NetSuite, Quickbooks, and Xero
- No credit check or personal guarantee required
- No annual fee or foreign transaction fees
- Must be a corporation, LLC, or LP to qualify
- Must have most of your operations and business spending in the US to qualify
- Corporate card with built-in spend management
- Cashback rewards on purchases
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- Unlimited free employee cards
- Requires a registered business and $50,000 in a U.S. business bank account to qualify
- Balance must be paid in full monthly
- Corporate card with customizable spending controls
- Cashback rewards on purchases
- Unlimited free physical and virtual employee cards
- Must have $50,000 in a business bank account to qualify
- Balance must be paid in full each month
- No personal guarantee or credit check required to qualify
- Advanced expense management automations and accounting integrations
- No annual fee or foreign transaction fees
- Must be a corporation, limited liability company, or LP to qualify
- Must have most of your operations and corporate spend in the US (though international purchases are supported with no foreign transaction fees)
- Corporate card with customizable spending controls
- Cashback rewards on purchases
- Unlimited free physical and virtual employee cards
- Must have $50,000 in a business bank account to qualify
- Balance must be paid in full each month
- Credit limits up to 30 times higher than traditional credit cards
- Sales-based underwriting makes for an easier qualification process
- Advanced expense management automations and accounting integrations
- No annual fee or foreign transaction fees
- Must be a corporation, limited liability company, or LP to qualify
- Must have most of your operations and corporate spend in the US (though international purchases are supported with no foreign transaction fees)
- Corporate card with customizable spending controls
- Cashback rewards on purchases
- Unlimited free physical and virtual employee cards
- Must have $50,000 in a business bank account to qualify
- Balance must be paid in full each month
- No credit check or personal guarantee required for eligibility
- Advanced expense management automations and accounting integrations
- No annual fee or foreign transaction fees
- Must be a corporation, limited liability company, or LP to qualify
- Must have most of your operations and corporate spend in the US (though international purchases are supported with no foreign transaction fees)
- Corporate card with customizable spending controls
- Cashback rewards on purchases
- Unlimited free physical and virtual employee cards
- Must have $50,000 in a business bank account to qualify
- Balance must be paid in full each month
- Advanced expense management automations and accounting integrations
- No personal guarantee or credit check required for eligibility
- No annual fee or foreign transaction fees
- Must be a corporation, limited liability company, or LP to qualify
- Must have most of your operations and corporate spend in the US (though international purchases are supported with no foreign transaction fees)
- Corporate card with customizable spending controls
- Cashback rewards on purchases
- Unlimited free physical and virtual employee cards
- Must have $50,000 in a business bank account to qualify
- Balance must be paid in full each month
- Advanced expense management automations and accounting integrations
- No personal guarantee or credit check required for eligibility
- No annual fee or foreign transaction fees
- Must be a corporation, limited liability company, or LP to qualify
- Must have most of your operations and corporate spend in the US (though international purchases are supported with no foreign transaction fees)
The Ramp Corporate Card is ideal for startups without a credit history. You just need an EIN number and $50,000 in a business bank account to qualify, and there's no credit check or personal guarantee required. Ramp's corporate card offers cashback on purchases and built-in expense management software to streamline your business finances.
Some of its features include receipt matching, subscription management, and AI-powered spending insights. Ramp is an excellent choice for startups that are aiming to earn rewards on business purchases while managing expenses.
- Ramp Corporate Card includes built-in spend management and travel-specific features
- Ability to set and enforce your company's travel spending policy on employee cards
- Features a travel dashboard displaying complete trip itineraries and flight information for each employee
- Offers cashback on purchases, including those made through travel booking platforms
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- Compatibility with 100+ applications for streamlined travel expense management
- Requires a registered business and $50,000 in a U.S. business bank account to qualify
- Balance must be paid in full monthly
The Ramp Card is an innovative corporate card, particularly suited for LLCs, that combines automated expense management features with cashback rewards on purchases. It offers detailed spending insights with AI-powered recommendations for cutting costs, and integrates seamlessly with accounting software to simplify financial tracking and reporting. Cards come with no annual fees, foreign transaction fees, or card replacement fees. Ramp is an excellent choice for businesses that want to streamline their financial operations while saving money.
- Cashback rewards on purchases
- No personal guarantee or credit check required for eligibility
- Automated expense management features like spending limits and receipt-matching
- Integration with accounting platforms including NetSuite, Quickbooks, and Xero
- Offers AI-powered cost-saving insights
- Unlimited physical and virtual employee cards
- Primarily focused on cost-cutting, which might not suit all business needs
- Geared mainly towards U.S. businesses, which may limit its appeal for international transactions
- Corporate card particularly suited for LLCs
- Combines automated expense management features with cashback rewards on purchases
- Offers detailed spending insights with AI-powered recommendations for cutting costs
- Integrates seamlessly with accounting software to simplify financial tracking and reporting
- No annual fees, foreign transaction fees, or card replacement fees
- Excellent choice for businesses that want to streamline their financial operations while saving money
- Cashback rewards on purchases
- No personal guarantee or credit check required for eligibility
- Automated expense management features like spending limits and receipt-matching
- Integration with accounting platforms including NetSuite, Quickbooks, and Xero
- Offers AI-powered cost-saving insights
- Unlimited physical and virtual employee cards
- Primarily focused on cost-cutting, which might not suit all business needs
- Geared mainly towards U.S. businesses, which may limit its appeal for international transactions
Card Details
The Ramp Card is an innovative corporate card, particularly suited for LLCs, that combines automated expense management features with cashback rewards. It offers detailed spending insights with AI-powered recommendations for cutting costs, and integrates seamlessly with accounting software to simplify financial tracking and reporting. Cards come with no annual fees, foreign transaction fees, or card replacement fees. Ramp is an excellent choice for businesses that want to streamline their financial operations while saving money.
Pros
- Cashback rewards
- No personal guarantee or credit check required for eligibility
- Automated expense management features like spending limits and receipt-matching
- Integration with accounting platforms including NetSuite, Quickbooks, and Xero
- Offers AI-powered cost-saving insights
- Unlimited physical and virtual employee cards
Cons
- Primarily focused on cost-cutting, which might not suit all business needs
- Geared mainly towards U.S. businesses, which may limit its appeal for international transactions
- No annual fee
- Earn a $250 statement credit after spending $5,000 within the first three months of card membership
- Introductory rate of 0% APR for the first 12 months
- 2% cashback for the first $50,000 in purchases each year. Then, unlimited 1% cashback
- Expanding Buying Power lets you exceed your credit limit while still receiving rewards
- 3% balance transfer fee
- No overlimit fees
- 0% intro APR for the first 12 months
- Access to more capital
- No annual fees
- You only get 2% cashback for the first $50,000 before going down to unlimited 1% cashback
- No elevated cashback rewards for specific categories
- $39 penalty fee for late payments and returned payments
