It’s Almost “That” Time!

Well, it’s that time of year, and everyone is preparing their list of tax deductions in hopes that the jolly Internal Revenue Service will provide them with tax breaks. Between now and year-end I will be addressing year-end tax planning, and hopefully, filling everyone’s stockings with deductions.

A perennial question is the deductibility of legal fees. I have received a request from an attorney, whose primary practice is the sale of businesses.  He wrote:

“We have a client who has asked whether our legal expenses for Trust and Estate planning could be run through his company (he is the sole owner). I am curious as to the accounting basis for doing this deduction. I will obviously have the client double check any course of action with his CPA, but I’m curious as to your thoughts on this matter. Any help or advice you can offer would be very much appreciated.”The deduction for Trust and Estate Planning fees, if they pertain to the production or collection of income, can be taken on one of three business tax forms. Examples include: Master LLC’s, FLP’s and Management Trusts. A taxpayer may deduct fees paid to attorneys or other professionals who are independent contractors, for “ordinary and necessary” expenses of their business. This includes appraisers, attorneys, systems analysts, consultants, and accountants/CPA’s. The general rule is, you may deduct legal fees incurred in attempts to produce or collect taxable income.

An individual may also take a deduction for Trust and Estate Planning fees. They are deducted on Form 1040 Schedule A. The law reads: “In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year—

(1) for the production or collection of income;

(2) for the management, conservation, or maintenance of property held for the production of income; or

(3) in connection with the determination, collection, or refund of any tax.

The rub, is that all of the income tax rules for the deductibility of legal fees are cobbled together. There is not one central location. The Treasury Regulations (sic IRS) is much more liberal than the federal tax code. Finally, a will, health care powers, and the like are not deductible—they do not produce income.

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