bake - March 2013 - 12

tax tips

Legal Fee Deductions
Fees must be incurred in carrying on a trade or business

Fees must be reasonable in amount

A taxpayer cannot deduct legal and professional fees paid or

Legal expenses that otherwise qualify for deduction are

incurred in a taxable year unless the taxpayer can show that

deductible only as long as they are also reasonable in amount.

the expense was paid or incurred in carrying on a trade or busi-

The regulations indicate that expenses “must be reasonable

ness. Whether the taxpayer’s activities amount to engaging in a

in amount and must bear a reasonable and proximate relation

trade or business is a factual question.

to the production or collection of taxable income or to the
management, conservation, or maintenance of property held

In general, the taxpayer must be engaged in an activity on a

for the production of income.”

continuous and regular basis in order to qualify as engaging in
a trade or business. One indication that a taxpayer is engaging

Fees must be paid or incurred during taxable year

in a trade or business is that he or she devotes a substantial

The fact that a service provider renders or provides a legal, or

portion of time to the business.

other professional service to the taxpayer in a particular tax
year does not mean that the fee can be deducted in that year.

In addition to the requirement that the taxpayer be regularly

Deductibility depends on whether the fee is paid or incurred

and continuously engaged in business activity, the taxpayer

in the taxable year in which the deduction is sought, which, in

must also be engaged in the activity with the predominant

turn, depends upon the taxpayer’s method of accounting.

purpose of making a proﬁt in order to be engaged in a trade
or business.

Fees must be paid by person to whom services are rendered
Another requirement for deductibility is that the expenses that

Fees must be ordinary and necessary

the taxpayer seeks to deduct must be those of the taxpayer

In order to be deductible as a trade or business expense, an

and not of someone else. Thus, generally, a corporation must

expenditure must be both ordinary and necessary. Since there

incur legal and other professional fees for its own beneﬁt and

is no ﬁxed rule as to what expenditures will constitute “ordinary

cannot deduct fees incurred only for the beneﬁt of its stock-

and necessary expenses,” the question is treated as essen-

holders. Legal expenses, however, and amounts paid by a

tially one of fact, and thus no broad generalizations regarding

corporation in defending or settling suits against employees

what expenditures will qualify can be made. The “ordinary and

arising out of the business are deductible by the corporation

necessary” requirement should be fairly easy to meet for most

since such expenditures are deemed to be for the beneﬁt of

legal fees, since the taxpayer will generally have good reasons

the corporation.

for using such professional services.

SOURCE: WWW.FDCPA.COM

12 < MAR 2013 | bakemag.com
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