As a business owner, you likely rely on tax professionals and advisors to help you navigate financial decisions, tax compliance, and regulatory requirements. But are these professional service fees deductible on your business tax return?
In most cases, the answer is yes. Whether you are an entrepreneur or an individual with a complex tax situation, it’s important to know when you can deduct tax preparation and advisory fees.
Individual Tax Preparation Fees
Individual taxpayers generally cannot deduct tax preparation and advisory service fees as miscellaneous itemized deductions. However, there are a few exceptions:
- Investment professionals who are registered investment advisors (RIAs) can deduct tax preparation and advisory service fees that are directly related to their investment activities.
- Taxpayers who are self-employed can deduct tax preparation and advisory service fees that are directly related to their self-employment income.
- Taxpayers who have complex tax returns may be able to deduct tax preparation and advisory service fees if they can show that the fees were necessary to prepare an accurate and complete tax return.
Keep in mind, the Tax Cuts and Jobs Act of 2017 suspended the deduction for miscellaneous itemized deductions, including tax preparation fees, through 2025. However, there is a possibility that this deduction could be reinstated before then.
Business Tax Preparation Fees
Preparing business tax returns can be tricky and best left to a professional who can see the big picture and help you maximize deductions. Hiring a CPA or accounting firm to prepare and file your annual personal and business tax returns is typically a deductible expense.
The fees must be ordinary and necessary. This means the amount you pay should be reasonable based on the complexity of your tax situation.
As long as you use an external tax professional and don’t have an in-house finance team, you can deduct tax preparation fees on your tax return. Just be sure to keep invoices and statements as documentation in case of an audit.
Business Advisory Fees
Beyond just tax preparation, many advisory and consulting services related to operating your business are also deductible expenses. Here are some examples:
- Accounting services like bookkeeping, payroll, audits, and financial statement prep
- Legal fees for business matters like contract reviews, compliance issues, and intellectual property
- IT consulting for services like network installation, security, data storage
- Marketing fees for advertising, graphic design, SEO, and marketing strategy
- HR consulting for hiring, onboarding, training, compensation, and benefits planning
- Business planning fees related to strategy, forecasting, and financial modeling
- Industry specific consultants relevant to your type of business
Let’s keep it simple. This means your monthly maintenance and annual advisory fees can be tax deductible for your business. While a wide range of advisory and consulting fees are deductible, they must be ordinary and necessary for your business, reasonable, and have proper documentation.
Limitations to Advisory Fee Deductions
While many advisory services are deductible, there are some limitations. For example, legal fees related to acquiring a business generally cannot be deducted. Also, purely personal advisory services unrelated to business are not deductible.
Proper documentation and deduction of allowable tax preparation and advisory fees can lead to substantial tax savings for your business each year. Keeping detailed records is essential to justify the deduction of these fees on your tax return in case of an audit.
With the help of a proactive tax advisor, you can take advantage of available tax deductions for many necessary services required to run your business successfully.
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