Legal fees either entirely deductible or non-deductible
March 21, 2014
No mention of award in settlement agreement
March 21, 2014
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Claiming a deduction for lawsuit against someone

The short answer to this question is “it depends.” The tax treatment of legal expenses, like attorney fees, depends upon how those fees were incurred. Fees incurred as “ordinary and necessary business expenses” are fully deductible under Section 162 in the year incurred. For this reason business defendants will rarely have difficulty or face audit challenges for deducting legal fees as business expenses. Although litigation and its attendant expenses are rarely questioned as being ordinary or necessary, care should be taken to establish a sufficient and direct nexus to a trade or business activity to ensure the full deductibility of fees.

Also, it should be noted that only the payor-taxpayer is entitled to take the deduction. Fees paid for services rendered to another are generally not deductible as a business expense, except in the case where a company pays attorney fees on behalf of an employee or officer for its own benefit. See Concord Instruments v. Commissioner, T.C. Memo 1994-248.

While legal fees incurred as “ordinary and necessary business expenses” are fully deductible, attorney fees which are entirely personal in nature are not. This is because Section 262 provides that no deduction shall be allowed for personal, living, or family expenses.