Legal fees are tax deductible when they are for running your business, and usually not when they are personal. Fees tied to buying an asset or forming the business sit in between: you recover them over time rather than all at once. So the real question is which of three buckets your lawyer's invoice belongs in.
This guide sorts the common bills into those buckets, with the IRS source for each, and covers the Canadian rule at the end. It describes US federal rules for the 2025 tax year and is educational, not legal or tax advice.
Are legal fees tax deductible? It depends on what the fee was for
Legal fees for operating a business are generally deductible in the year paid; legal fees to acquire an asset or form the business are capitalized or amortized; and personal legal fees are generally not deductible.
- Deduct now: contracts, collections, disputes, employment matters and business tax advice. Source: IRS Instructions for Schedule C (2025), line 17, and IRS Publication 334.
- Capitalize or amortize: buying property or a business, and forming an entity. Sources: IRS Publication 551 and IRC §195, §248 and §709.
- Not deductible: divorce property settlements, child custody and your own will. Sources: IRS Publications 529 and 334.
Bucket 1: deductible now (ordinary business legal fees)
The IRS Instructions for Schedule C (2025) tell sole proprietors to include on line 17, "Legal and professional services," fees charged by accountants and attorneys that are ordinary and necessary expenses directly related to operating the business. That includes fees for business tax advice and for resolving asserted tax deficiencies related to the business.
Typical examples:
- Drafting or reviewing client, supplier or freelance contracts
- Collecting unpaid invoices and sending demand letters
- Defending a dispute that arises from the business
- Employment and contractor agreements, and employment disputes
On the cash method, which most sole proprietors use, IRS Publication 334 says you generally deduct expenses in the year you actually pay them.
Landlords: the 2025 Schedule E has line 10, "Legal and other professional fees," for rental real estate. A lease review or eviction proceeding goes there. Our landlord tax deductions guide covers the rest of Schedule E.
Bucket 2: capitalize or amortize (buying assets and starting up)
Buying an asset. IRS Publication 334 says you usually can't deduct legal fees you pay to acquire business assets; you add them to the basis of the property. Publication 551 lists legal fees for a title search and preparing the sales contract and deed among the closing costs added to basis. You then recover them through depreciation, or when you sell. The Schedule E instructions add that legal fees to defend or protect title to rental property, recover it, or develop or improve it are capitalized too.
Starting or forming the business. Legal fees to form a corporation (drafting the charter and by-laws) or a partnership are organizational costs under IRC §248 and §709. Those two sections cover corporations and partnerships, so for a sole proprietorship or a single-member LLC taxed as one, legal costs of setting up the business before it opens are generally start-up costs under §195. Neither is deducted like an ordinary expense. Each has a first-year election to deduct up to $5,000, reduced once the costs exceed $50,000, with the rest amortized over 180 months. Our guide to deducting startup costs works through the election and the phase-out with examples, so we won't repeat it here.
Legal fees for running an LLC after it is open — a contract review in year two, say — are back in Bucket 1.
Bucket 3: usually not deductible (personal legal fees)
IRS Publication 529 (current revision, December 2020) says you can't deduct personal legal expenses, and names legal fees for child custody and for property claims or a property settlement in a divorce as examples. Most other personal matters — your own will, a personal traffic matter, the purchase of your home — generally fall in the same place.
For individuals, legal fees that once qualified as miscellaneous itemized deductions subject to the 2% floor were suspended for 2018 through 2025. P.L. 119-21, enacted in 2025, removed the end date, so IRC §67(h) now disallows miscellaneous itemized deductions for every tax year after 2017.
Two narrow exceptions. The 2025 Form 1040 instructions for Schedule 1 let you deduct, above the line, attorney fees and court costs for actions involving certain unlawful discrimination claims (line 24h), limited to the gross income from the action, and fees paid in connection with an IRS whistleblower award (line 24i), limited to the award included in income. If either may apply to you, confirm eligibility with a tax professional before claiming it.
Mixed bills
One invoice often covers business and personal work. IRS Publication 334 says that if fees include work of a personal nature, such as making a will, you can deduct only the part related to your business. The practical fix is to split the bill:
- Ask the firm to itemize the invoice by matter, or to bill business and personal matters separately.
- If that is not possible, allocate by the hours on the time sheet.
- Keep a short note with the invoice saying how you split it.
Quick sorter: which bucket is my legal bill in?
| Legal bill | Bucket | Where it goes (US, 2025) |
|---|---|---|
| Drafting or reviewing a client or supplier contract | Deduct now | Schedule C line 17 |
| Collecting unpaid invoices | Deduct now | Schedule C line 17 |
| Defending a business dispute or a claim from a customer | Deduct now | Schedule C line 17 |
| Employment matters for your staff | Deduct now | Schedule C line 17 |
| Tax advice or a tax deficiency related to your business | Deduct now | Schedule C line 17 |
| Lease review or eviction for a rental property | Deduct now | Schedule E line 10 |
| Forming an LLC, partnership or corporation | Start-up or organizational cost | First-year election, then 180 months |
| Buying a building, equipment or another business | Capitalize | Added to the asset's basis |
| Defending or protecting title to rental property | Capitalize | Added to the property's basis |
| Divorce property settlement or child custody | Not deductible | Personal |
| Writing your own will or estate plan | Not deductible | Personal |
| Certain unlawful discrimination claims | Above-the-line (limited) | Schedule 1 line 24h, up to the income from the action |
The table is a sorting aid, not a ruling on your facts. The same type of fee can move buckets depending on why it was incurred. Estimates — confirm with your tax professional.
Canada: T2125 professional fees
In CRA guide T4002 (2025), business legal fees go on line 8860, "Professional fees (includes legal and accounting fees)," of form T2125. The guide says you can deduct accounting and legal fees for advice and help with keeping your records, and legal fees for preparing an objection or appeal against an assessment for income tax, CPP or QPP contributions, or EI premiums. It also says you cannot deduct legal fees you incur to buy a capital property; you add them to the property's cost. Rules for personal legal fees are outside that guide, so check CRA's guidance for your situation.
Keep the engagement letter and the invoice
The bucket depends on what the work was for, so keep the engagement letter or a note of the matter with each invoice. If a bill is ever questioned, that description is what shows it was a business contract review and not a personal one.
ExpenseBot is an expense tracker that scans your Gmail for invoices and receipts, including the ones law firms email, and writes each one into a Google Sheet in your own Drive with its date, vendor, amount and category. Legal fees are categorized for Schedule C, and you can adjust the category or split a mixed invoice before year end. It does not decide which bucket a fee belongs in, and it is not legal or tax advice. See how the Gmail receipt scanner works, or how the year-end workflow turns the year's expenses into Schedule C totals for you or your accountant.
If the invoice is from your accountant rather than your lawyer, read whether tax preparation fees are deductible — the business part lands on the same line, but personal tax preparation has its own rules. New to the vocabulary? Start with what a tax write-off is actually worth.
Frequently Asked Questions
Are legal fees tax deductible for a small business?
Generally yes, when they are ordinary and necessary expenses directly related to operating the business. A sole proprietor deducts them on Schedule C, line 17 (Legal and professional services), in the year paid under the cash method. Fees to buy a business asset are the exception: they are added to the asset's basis. Estimates — confirm with your tax professional.
Can I deduct the legal fees for forming my LLC or corporation?
Not as an ordinary expense. Legal fees to form a corporation or partnership are organizational costs, and costs of getting a sole proprietorship or single-member LLC started are generally start-up costs. Each lets you elect to deduct up to $5,000 in the first year, reduced once the costs pass $50,000, with the rest amortized over 180 months (IRC §195, §248 and §709). Estimates — confirm with your tax professional.
Are divorce legal fees tax deductible?
Generally no. IRS Publication 529 lists legal fees for child custody and for property claims or a property settlement in a divorce among the personal legal expenses you cannot deduct. Miscellaneous itemized deductions are disallowed under IRC §67(h), which P.L. 119-21 made permanent.
Are legal fees for buying a rental property deductible?
Not in the year you pay them. IRS Publication 551 lists legal fees such as title search and preparing the sales contract and deed among the costs you add to the property's basis, which you recover through depreciation (on the building, not the land) or when you sell. Ongoing legal fees for running the rental, such as a lease review, go on Schedule E, line 10.
Are attorney fees for collecting unpaid invoices deductible?
Yes. Collecting money your business is owed is a legal cost of operating the business, so a sole proprietor deducts it on Schedule C, line 17, in the year paid.
I paid one lawyer to review a client contract and draft my will. Can I deduct the whole bill?
No, only the business part. IRS Publication 334 says that if the fees include work of a personal nature, such as making a will, you can take a business deduction only for the part related to your business. Ask the firm to split the invoice. Estimates — confirm with your tax professional.
Are accountant or tax preparation fees the same as legal fees?
They share Schedule C line 17 when they are for the business, but personal tax preparation has its own rules. See our guide to whether tax preparation fees are deductible.
This guide is educational and not legal advice. It describes US federal rules for the 2025 tax year and the Canadian T2125 rule in general terms. Sources: IRS Instructions for Schedule C (2025); IRS Publication 334 (2025); IRS Publication 551; IRS Publication 529; IRC §67(h), §195, §248 and §709; 2025 Instructions for Form 1040 (Schedule 1 lines 24h and 24i); IRS Instructions for Schedule E (2025); CRA guide T4002 (2025). Estimates — confirm with your tax professional.