If you’ve received a letter from the IRS questioning some of your deductions, the experienced tax attorneys at Wiggam Law can review your situation, help you respond, and represent you in discussions with the IRS.
Tax laws are continuously changing and can be confusing, particularly with all the special provisions and one-time exceptions related to the pandemic. If you are an independent contractor, run a small business and use Schedule C for your taxes, or are an individual who itemizes, you might be wondering what you can deduct that won’t draw attention from the IRS.
Can I Deduct Legal Fees?
Taxpayers can deduct tax preparation fees, so what about legal fees? The answer is it depends. Most personal legal expenses, such as drafting a will or getting a divorce, are not deductible. Alternatively, many small business legal expenses are allowed as a deduction against business income.
The IRS generally allows businesses to deduct ordinary and necessary attorney fees that are directly related to the operation of a business. These might include fees for drafting contracts, protecting intellectual property, going to court, or dealing with employment issues.
Legal expenses related to the acquisition of business assets, however, generally are not deductible. These costs are added to the basis value of property.
It’s important to keep personal and business legal expenses separate. If the same attorney handles both your personal and business matters, make sure any invoices that include work for both clearly delineate personal legal fees from matters related to your business operations.
What Can I Deduct as a Business Owner?
In addition to legal fees, most other costs related to operating your trade or business are deductible so long as you are running a business that seeks to be profitable. The IRS watches for individuals attempting to pass a hobby off as a business operation and profitability plays into its evaluation.
Common allowable business deductions include, but are not limited to:
- Costs of goods sold
- Employees pay
- Many expenses related to starting your business
- Interest on a business loan
- Business use of your home
- Certain real estate taxes
- Employer’s portion of employment taxes
- Many small-dollar properties such as office furniture, computer equipment, and specialized business assets (not real estate)
- Business bad debts
As with many other tax issues, the IRS rules around business expenses can be detailed and complicated. It’s best to review IRS guidelines and consult a professional for specific advice. If the IRS questions a business expense once you have deducted it, a tax attorney can assess the situation and help you respond as well as represent you in front of the agency.
What Are Deductions for Individuals?
The Tax Cuts and Jobs Act of 2017 almost doubled the individual standard deduction and eliminated or put a cap on some popular itemized deductions. As a result, many married and single individuals now choose to take the standard deduction rather than to itemize. The standard deduction for married filing jointly is $25,100 for tax year 2021 and $12,550 for single individuals and married filing separately.
For those who do itemize, here are some common allowable items to include on Schedule A of your Form 1040:
- State and local income, sales, and property taxes up to a total of $10,000 (for married filing jointly, $5,000 for single or married filing separately)
- Charitable contributions up to 60% of a taxpayers adjusted gross income (AGI), although this limit was suspended for tax years 2020 and 2021 as part of pandemic relief efforts
- Gambling losses
- Interest on mortgages up to $750,000 for single, married filing jointly, and head of household ($375,000 for each married individual filing separately)
- Unreimbursed medical expenses that exceed 7.5% of the taxpayer’s AGI
For tax year 2021, the IRS is allowing a maximum $300 ($600 for married filing jointly) deduction for cash contributions made to qualifying charities for those who take the standard deduction. The provision is a temporary law change enacted as part of pandemic relief.
What Records Should I Keep?
Regardless of your filing status, it’s important to keep good records for any business or personal expenses that you deduct. For businesses, keep cancelled checks, invoices, cash register tapes, credit card sales slips, mileage logs, rental contracts, and bank and credit card statements that show the date paid and amount of any expenses deducted. For individuals making charitable contributions, you should receive a letter from the charity acknowledging any contribution over $250. Keep that letter as well as any cancelled checks or credit card receipts for all contributions made.
If you have been contacted by the IRS about some of your business expenses or personal itemized deductions, it’s best to speak with an experienced tax attorney about all your options. At Wiggam Law, our team of experienced tax lawyers can help you evaluate your choices and represent you. Give us a call today at (404) 233-9800 to get started.