Discussion Archives:ConsQ on Legal fees and tax deduction

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Discussion Forum Index --> Advanced Tax Questions --> ConsQ on Legal fees and tax deduction


Discussion Forum Index --> Tax Questions --> ConsQ on Legal fees and tax deduction

Gayahnda (talk|edits) said:

8 October 2007
Hi,

I have paid legal fees resulting from a lawsuit alleging breach of contract. I earned income from the business in 2005, however, I incurred the legal fees in 2007. I am no longer involved in the business, but as stated before, am paying legal fees from the lawsuit due to money I earned from the busines in 2005. Are these fees deductible on my 2007 return

Donniecastleman (talk|edits) said:

8 October 2007
I'd say yes, if you paid them in 2007 rather than 2005, you wouldn't go back and amend the return if you're on the cash basis and you paid them, of course the expenses weren't incurred until 2007, isn't there a way to write off the legal fees off of the face of the return without opening up another schedule C, being that there will be no self-employment tax ramifications?

I hate lawsuits, I think blood-sucking lawyers have made more than enough money off of the public.

TheTinCook (talk|edits) said:

8 October 2007
I think you could make a case for treating it as a 2% misc deduction on Sch A. I assume that the OP exited the business in 2005 and the start of the litigation occured after the close of the business.

My reasoning is that the taxpayer is not carrying on a trade or business for TY 2007 thus it would not be deductable under Sec 162. However it would be deductable under Sec 212 since it is an ordinary and necessary expense paid in the production of income. Take note of Reg 1.212-1(b) which expands income to include income from prior years for purposes of Sec 212.

But as they say, more facts are needed.

Dennis (talk|edits) said:

8 October 2007
My vote is for the Schedule C. The date of the infraction seems more pertinent than the date the action commenced.

Jdanielle (talk|edits) said:

8 October 2007
You report the expense on the Form where the incomne was earned. Despite the expense being paid in 2007 & income earned in 2005. Therfore, you would report it on Schedule C. If you had 1120S expense from a prior year, it would be on Sch E page 2.

TexCPA (talk|edits) said:

8 October 2007
I vote Schedule C as well, legal fee deduction in the course of a business albeit a closed business, is still a business deduction. ordinary does not mean frequent.

God Luck

TexCPA

Death&Taxes (talk|edits) said:

8 October 2007
This is similar to a retroactive billing for a local business tax, or any other expense that had to be forked out as a result of a prior business. Schedule C.
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