The short answer: some legal expenses are tax deductible, but most personal ones aren’t. The IRS draws a hard line between legal fees that generate income or protect business assets versus those that handle personal matters. Understanding which side of that line your legal bills fall on can save you thousands in taxes—or prevent costly mistakes if you claim deductions you shouldn’t.
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Deductible Business Legal Expenses
If you own a business—whether you’re a sole proprietor, LLC, S-corp, or C-corp—most legal expenses directly tied to running that business are deductible. This is the clearest category, and it’s where most people find legitimate write-offs.
Business legal fees that qualify include:
- Contract review and drafting for client agreements
- Trademark and patent registration and defense
- Employment law consultations (hiring, firing, workplace policies)
- Lease negotiations for business property
- Debt collection and creditor defense
- Business formation documents and corporate counsel
- Tax controversy representation (yes, tax attorneys count)
The IRS allows these deductions because they’re ordinary and necessary business expenses under legal tax service guidelines. The key word is “business”—the expense must relate to generating income or protecting your company’s assets.
If you’re self-employed, you can deduct legal fees on Schedule 1 (Form 1040) as business expenses. For corporations, these go on the corporate tax return. For LLCs and partnerships, they flow through to the individual owner’s return but are still business deductions.
Non-Deductible Personal Legal Costs
Here’s where most people get disappointed: personal legal matters are generally not tax deductible, even if they cost a fortune. The IRS considers these personal expenses, similar to medical bills or car repairs—they’re your responsibility, not a business cost.
Personal legal expenses that DON’T qualify include:
- Divorce proceedings and alimony/child support arrangements
- Criminal defense (unless you’re a criminal defense attorney deducting professional development)
- DUI/traffic violations
- Custody battles and family law matters
- Wills, trusts, and estate planning (with a major exception—see below)
- Adoption proceedings
- Personal injury claims (slip and fall, car accidents)
- Property disputes with neighbors
- Name change or immigration matters
The reasoning is straightforward: these expenses don’t generate business income. Even if you’re fighting hard and spending serious money, the IRS views it as a personal matter that doesn’t qualify for deduction.
Gray Area: Mixed-Purpose Legal Fees
This is where things get tricky, and where tax professionals earn their keep. Some legal situations involve both personal and business elements, and the IRS requires you to split the bill accordingly.
Estate planning fees are a perfect example. If you’re a business owner creating an estate plan that includes succession planning for your company, you can deduct the portion of attorney fees that relate to business succession. However, the portion dealing with personal asset distribution to heirs? Not deductible. Many tax advisors recommend asking your attorney to itemize the bill separately: “3 hours on business succession ($900)” and “2 hours on personal estate distribution ($600).” You deduct only the business portion.
Divorce is another gray area. If you’re a business owner and your divorce involves dividing business assets or determining how business income affects spousal support, that portion of legal fees might be deductible—but only the part directly related to business asset valuation or division. Personal divorce costs remain non-deductible.
The IRS looks at the primary purpose of the legal work. If it’s primarily personal with incidental business elements, it’s not deductible. If it’s primarily business with some personal overlap, you must allocate.
How to Report Legal Deductions
Once you’ve identified which legal expenses qualify, you need to report them correctly or they won’t save you a penny.
For self-employed individuals: Report business legal expenses on Schedule C (Form 1040) under “Legal and professional services.” This reduces your self-employment income and your taxable income.
For small business owners (LLC/S-corp): Deduct legal expenses on the business tax return (Form 1065 for partnerships, Form 1120-S for S-corps, Form 1120 for C-corps). These expenses reduce the entity’s taxable income before it flows to your personal return.
For employees: Here’s the bad news—employee legal expenses are almost never deductible, even if they relate to your job. The Tax Cuts and Jobs Act eliminated the deduction for unreimbursed employee expenses in 2017, and it hasn’t come back.
The timing matters too. Deduct legal expenses in the year you incur them, not when you pay them (if you’re using accrual accounting). If you pay a retainer in December for work that happens in January, the deduction typically goes on next year’s return.
Documentation You’ll Need
The IRS doesn’t just take your word for it. If you’re audited, you’ll need to prove that legal expenses were legitimate, necessary, and business-related.
Keep these documents:
- Detailed invoices from your attorney (showing what work was performed)
- Engagement letters or fee agreements
- Cancelled checks or credit card statements showing payment
- Business records showing why the legal work was necessary (contracts, correspondence, business plans)
- If you allocated expenses between personal and business, documentation showing how you split the costs
Vague invoices that just say “legal services—$5,000” are a red flag. Good attorneys itemize their work: “Contract review—4 hours,” “Lease negotiation—6 hours,” etc. If your invoice isn’t detailed, ask your attorney for a more specific breakdown.
Keep these documents for at least three years (seven if you’re being extra cautious). If you’re audited and can’t produce documentation, you lose the deduction—and potentially face penalties if the IRS decides you were being negligent.
Common Deduction Mistakes
I’ve seen smart business owners make preventable errors on legal deductions. Here are the biggest ones:
Mistake #1: Deducting personal legal expenses. A business owner paid $15,000 in divorce attorney fees and tried to deduct them as business expenses because “the stress affected my business.” The IRS said no. Divorce is personal, period. Even if it impacts your business, the legal fees themselves aren’t deductible.
Mistake #2: Not allocating mixed-purpose expenses. A contractor spent $8,000 on legal fees that covered both business contract review (60%) and personal property dispute (40%). They deducted the full $8,000. The IRS adjusted it down to $4,800. Allocation is your friend here—do it right.
Mistake #3: Claiming employee legal expenses. An employee paid for an employment lawyer to negotiate a severance package and tried to deduct it. Employee legal expenses aren’t deductible (with very rare exceptions). Only employers can deduct employment-related legal costs.
Mistake #4: Forgetting about estimated tax payments. You deduct $20,000 in legal expenses but don’t adjust your estimated quarterly tax payments. Come tax time, you owe more than you expected. Plan ahead and adjust your estimated payments if you have large legal deductions.
Mistake #5: Mixing personal and business without documentation. You pay your attorney $10,000 and claim $7,000 is business-related. Without clear documentation from your attorney showing the breakdown, the IRS can disallow the entire deduction. Always get itemized invoices.
State Tax Considerations
Federal tax rules are just the beginning. Some states have different rules for legal expense deductions, and a few states don’t allow certain business deductions that the IRS permits.
State-specific issues to consider:
- No state income tax states: If you’re in Florida, Texas, Nevada, or another state without income tax, this whole conversation is moot for state purposes. You only care about federal deductions.
- Franchise tax states: Some states (like Texas with its franchise tax and California with its LLC tax) have different rules about what’s deductible. Your federal deduction might not reduce your state tax bill the same way.
- Pass-through entity taxes: Some states have recently implemented pass-through entity taxes. Your legal deductions might affect your state tax differently than your federal tax.
If you operate in multiple states, consult a CPA familiar with those state rules. A deduction that works perfectly for federal purposes might not translate to state savings, or might even create state tax complications.
Frequently Asked Questions
Can I deduct legal fees for a lawsuit I’m defending?
It depends on the lawsuit. If you’re defending a business lawsuit (a customer suing your company, a contract dispute), yes—those legal fees are deductible business expenses. If you’re defending a personal lawsuit (someone suing you over a car accident, a property dispute unrelated to your business), no. The nature of the lawsuit matters, not just the fact that you’re paying to defend yourself.
Are tax attorney fees deductible?
Yes, but with nuance. Fees for a tax attorney helping with business tax issues are deductible. Fees for personal tax matters (like an audit of your personal return, estate planning) are not deductible on your federal return. Some states allow deductions for personal tax attorney fees, so check your state rules.
What about legal fees for setting up an LLC or corporation?
These are capitalized, not deducted. You add them to your basis in the business and depreciate them over several years, or deduct them as startup costs if they qualify. This is different from ongoing legal expenses, which are typically deductible in the year incurred. Consult a CPA on the best approach for your situation.
Can I deduct legal fees if I’m an employee?
Almost never. Unreimbursed employee expenses were eliminated as a deduction in 2017. If your employer reimburses you, that’s not taxable income—but you can’t deduct it yourself. The only exception is if you’re suing your employer for wages owed, and even then, the rules are strict.
Do I need to report legal expenses separately on my tax return?
Not separately—they go on the same line as other professional services on your business return (Schedule C for self-employed, the appropriate business tax form for entities). However, your accountant might track them separately in your bookkeeping for clarity.
Bottom Line
Legal expenses are tax deductible if—and only if—they’re directly tied to your business. Business owners have a legitimate opportunity to deduct contract review, employment law, trademark protection, and similar costs. Personal legal matters, no matter how expensive or stressful, don’t qualify.
The gray areas require careful allocation and documentation. If you’re dealing with mixed-purpose legal work, get your attorney to itemize the bill and work with a CPA to determine the deductible portion. Keep detailed records, report expenses correctly on your tax return, and don’t try to stretch personal expenses into business deductions—the IRS audits this stuff regularly.
When in doubt, ask a tax professional before claiming a deduction. A $200 consultation with a CPA can save you thousands in audit adjustments or penalties. And if you’re self-employed or a business owner with significant legal expenses, understanding how settlements and legal costs affect your taxes is crucial for accurate planning.
Remember: the goal isn’t to deduct everything. It’s to deduct what legitimately qualifies and avoid the ones that don’t. That’s how you stay on the IRS’s good side.
