The general rule of thumb is that legal expenses may be deducted for anything revolving around producing or collecting taxable income, and calculating, collecting, or acquiring a refund of any tax. Business-related legal fees are the most commonly deductible legal fees, though a variety of non-business related legal fees are also available.If you are unsure whether your legal fees are personal or business fees, ask yourself if you would have incurred the expense if you were not conducting business.;
, This test is widely accepted by courts throughout the U.S. use it to determine whether or not legal fees are a business-related expense. To perform this test, you need to look at the origin and character of the legal fee. Then you will need to determine whether the fee arose from a personal or a capital transaction. In other words, was this fee part of a business or personal activity?For example, legal fees from a divorce proceeding are personal, but legal fees paid to defend your company's reputation are business related., Business fees are those that are incurred while carrying on a trade or conducting business. While there is a fair amount of wiggle room in these definitions, to qualify as a business legal expense, the expense and the consultation must be:



Ordinary and necessary. Ordinary expenses are those that are common and acceptable in your line of business. Necessary expenses are those that are helpful and appropriate for your trade.Reasonable in amount. Expenses must "resemble a reasonable and proximate relation to the production or collection of taxable income or to the management, conservation, or maintenance of property held for the production of income."Fees must have been paid by the person who received counsel, and incurred while carrying on a trade or engaging in business. If someone else paid your legal fees, you're not able to deduct those fees on your taxes.
 In some cases, such as home-based or self-employed family businesses or expenses, it can be difficult to differentiate between legal fees that are deductible and personal expenditures. If the fee is both a personal and business expense, allocate the appropriate percentage of the expense to personal expenses, and the remaining sum to business expenses.


For example, legal fees incurred to maintain a home-based office within your personal residence would qualify as deductible.
As another example, if you paid $300 to have your personal and business taxes prepared, with each return costing the same amount, then you would have $150 in personal legal expenses and $150 in business legal expenses., If you are having trouble determining how much you can deduct, consider these factors to help you decide:time required of legal counsel
difficulty of the tax questions presented to legal counsel
amount of tax involved
legal fees customarily charged in your locality for the legal services performed
favorable or unfavorable outcome obtained as a result of the legal services

, These types of legal fees are deductible as a business-related expense. You can deduct legal expenses incurred in your attempts to produce or collect taxable income as well as legal fees you pay in connection with the determination, collection, or refund of any tax.You can also deduct legal expenses that are related to:


performing your job
maintaining your employment
defending yourself against criminal charges that arose out of the performance of your trade or business
related to divorce tax advice when the legal billing specifies the reasonable allocation of fees toward tax advice
collection of taxable alimony

, A contingent legal fee agreement is when a client cannot pay all or part of the attorney’s legal fees up front, so the attorney takes a percentage of the client’s award if the case is won. A non-contingent legal fee agreement is when a client pays the attorney’s legal fees up front.Contingent attorney fees are not deductible, but non-contingent attorney fees may be deductible. Before deducting these fees, talk to a tax specialist to determine if the fees are deductible based on the details of your case.
Determine if the fees are personal legal fees or business fees.
Perform an origin of the claim test.
Learn what business legal fees qualify.
Distinguish between the more difficult cases.
Consider IRS approved factors to help you determine if a deduction allocation is reasonable.
Determine if your legal fees were related to producing or collecting taxable income or getting advice.
Know the difference between contingent and non-contingent legal fee agreements.
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