How to Deduct Legal Fees

The Tax Cuts and Jobs Act (TCJA), known as tax reform, made it more difficult for you to deduct your legal fees.

The new tax reform law suspended your legal fees as 2 percent miscellaneous itemized deductions.

This means you need to look for other ways to deduct legal fees, such as claiming them as business or rental property expenses.

Let’s look at some ways you can do this with your legal fees:

  • You incur legal fees to sue a client for nonpayment of your invoices. You deduct those legal fees as a business expense.
  • You incur legal fees to sue a vendor that did not perform the services you paid them to perform. You deduct those legal fees as a business expense.
  • You incur legal fees to sue a vendor that damaged your rental property. You deduct those legal fees as a rental expense.
  • You incur legal fees to evict a tenant who stopped paying rent. You deduct those legal fees as a rental expense.

EXCEPTION ALERT! 

The TCJA disallowed all business deductions for settlements or payments and the related legal fees for sexual harassment or abuse claims if the settlement or payment is subject to a nondisclosure agreement.

If you incur legal fees related to the ownership or protection of your property, then you generally capitalize the legal fees and add them to the tax basis of your property.

It’s not too difficult to figure out ways to get those legal fees deducted, but it does require a bit of creative thinking.