John Bullis: Tax rules for legal fees

Legal fees you pay for "ordinary and necessary" business expenses are usually deductible for income taxes.

The legal actions for which fees are currently deductible include:

• Creating or reviewing contracts and agreements.

• Suing for breaches or defending against claims of breach of contract.

• Assistance in collecting your accounts receivable.

• Defending against trademark, patent or copyright infringement claims.

• Defending against wrongful discharge or other employee claims.

• Obtaining tax advice or actions involving federal or state tax departments.

If the fees are for starting a business, the legal fees related to creating a partnership, corporation or LLC can be deductible. Start up costs of $5,000 are immediately deductible. Fees that are greater than that are deductible, but during the next 180 months as amortization expense.

If you incur legal fees to buy a capital asset, like a building, those are usually "capitalized" and deducted as depreciation or amortization expense-over the life of the asset.

No deduction for legal fees is allowed for work that is purely personal in nature.

An example is legal fees for a divorce in which there are no issues that relate to the collection or production of income. That could be work for issues about child support only, for example.

The U.S. Supreme Court case known as "Gilmore" some years ago set the standard of "the origin of the claim" determines if the legal fees are deductible. Some IRS agents have tried to say every divorce is personal in nature and that therefore related legal and accounting fees are not deductible. The IRS is not always right; look at the court cases.

Most attorneys will be glad to give an estimate or even an itemized invoice in divorce actions. The part of the fees that relates to protecting income or to the production of income is deductible. The itemized invoice should be saved with your other tax records.

During the years I have seen many examples of business owners "stepping over dollars to pick up pennies" - not hiring an attorney early enough or trying to do their own legal documents. Usually the benefits of using an attorney are far greater than the cost.

The value of good legal advice is large. Just like you should have a banking relationship, you probably could benefit from having an attorney relationship.

Did you hear, "When wrong, be willing to change ... when right be easy to live with?"

• John Bullis is a certified public accountant, personal financial specialist and certified senior adviser serving Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs, LLC.