Are Legal Fees Tax Deductible? (For Businesses and Individuals)

Legal fees are tax deductible when they are an ordinary and necessary cost of running a business or rental property. Most personal legal fees, like those for divorce, custody, wills or buying a home, are not deductible. That rule is now permanent.

There are important exceptions, though. If you win or settle a discrimination or whistleblower case, you may be able to deduct your attorney's fees before calculating your taxable income. That can change your tax bill by tens of thousands of dollars.

This guide explains which legal fees businesses and individuals can deduct in 2026, how settlements and contingency fees are taxed, and where to report legal fees on your tax return.

Are Legal Fees Tax Deductible in 2026?

Yes, for businesses. Mostly no, for individuals. The answer depends on why you hired the lawyer, not on who you are or whether you won.

• Business legal fees are generally deductible under IRC Section 162 if they're ordinary and necessary for your trade or business.
• Personal legal fees are not deductible, with a few exceptions written into the tax code.
• Legal fees to buy or create an asset aren't deducted right away. They're added to the cost of the asset and recovered over time.

What changed with the One Big Beautiful Bill Act?

Before 2018, individuals could deduct some legal fees as miscellaneous itemized deductions. This covered fees to collect taxable income, such as alimony, and fees for tax advice. The deduction only applied to the amount above 2% of adjusted gross income.

The Tax Cuts and Jobs Act suspended these deductions for 2018 through 2025. The One Big Beautiful Bill Act, signed July 4, 2025, removed the end date. IRC Section 67(h) now says no miscellaneous itemized deduction is allowed "for any taxable year beginning after December 31, 2017." The deduction is not coming back in 2026 unless Congress changes the law again.

Business legal fees were never affected. They're deducted as business expenses, not itemized deductions.

Are Legal Fees Tax Deductible for a Business?

Business legal fees are tax deductible when they're ordinary and necessary expenses of running the business. "Ordinary" means common in your industry. "Necessary" means helpful and appropriate for the business. The fee doesn't have to lead to a good result. A business can deduct legal fees for a lawsuit it lost.

Business legal fees you can usually deduct

• Drafting and reviewing contracts with customers, vendors and employees
• Defending or bringing lawsuits over business operations
• Employment matters, such as wrongful termination claims or employee handbooks
• Collecting unpaid invoices
• Regulatory and licensing compliance
• Business tax advice, tax planning and IRS audit representation
• Defending an existing patent, trademark or copyright
• Evictions and lease disputes for rental property you own
• Criminal defense, if the charges come directly from your business activities

Legal fees a business must capitalize instead of deduct

Some legal fees can't be deducted in the year you pay them because they create or protect something with lasting value. These are capitalized, meaning they're added to the asset's cost basis and recovered through depreciation, amortization or when you sell.

• Buying real estate, equipment or another business
• Defending or perfecting title to property you own
• Obtaining a new patent or registering a trademark
• Merger and acquisition work

Can you deduct legal fees for starting a business?

Partly. Under IRC Section 195, you can deduct up to $5,000 of startup costs in the year the business opens, including legal fees. That $5,000 is reduced dollar for dollar once total startup costs go over $50,000. Whatever you can't deduct is spread evenly over 180 months. A similar rule applies to organizational costs, like the legal fees for forming an LLC or corporation.

Are Legal Fees Tax Deductible for Individuals?

For most people, no. Legal fees for personal matters can't be deducted on a federal return, whether or not you itemize. The main exceptions are discrimination claims, whistleblower awards and legal work tied to your own business or rental property.

Are divorce legal fees tax deductible?

No. Legal fees for a divorce, legal separation or child custody case are personal and not deductible. This includes the part of the bill for tax advice or for getting alimony, which was partly deductible before 2018.

This is true even if the divorce affects your business. In United States v. Gilmore, the Supreme Court held that legal fees to protect business assets in a divorce weren't deductible, because the claim came from the marriage, not the business. This is called the "origin of the claim" test, and the IRS still uses it.

Are estate planning fees tax deductible?

No. Fees for wills, trusts and powers of attorney are personal and not deductible for the individual. The part of an estate planning bill for tax advice was deductible before 2018 but isn't now.

Fees an estate or trust pays to administer the estate are handled under different rules and may be deductible by the estate or trust itself. An estate attorney or CPA can tell you which apply.

Are personal injury attorney fees tax deductible?

No, but in most physical injury cases that doesn't matter. Damages for physical injuries or physical sickness are generally not taxable, so there's nothing to deduct the fees from. The tax problem comes up with settlements that are taxable, like employment, defamation or emotional distress claims without physical injury.

Are legal fees for rental property deductible?

Yes, if the fees relate to running the rental, such as evictions, lease disputes or collecting rent. Report them on Schedule E. Legal fees for buying the property are added to its cost basis instead.

Above-the-Line Deductions: When Individuals Can Deduct Attorney Fees

There are two exceptions where individuals can deduct legal fees above the line. That means the fees reduce your adjusted gross income directly, even if you take the standard deduction.

IRC Section 62(a)(20) allows a deduction for attorney fees and court costs in a case involving:

• A claim of unlawful discrimination
• A claim under the federal False Claims Act
• Certain Medicare secondary payer claims

"Unlawful discrimination" covers more than people expect. IRC 62(e) includes claims under the Civil Rights Act, the ADA, the ADEA, the Fair Labor Standards Act and the FMLA. It also covers federal whistleblower protection laws, and federal, state or local laws regulating any part of the employment relationship, including wages and benefits.

IRC Section 62(a)(21) allows a deduction for attorney fees and court costs tied to whistleblower awards from:

• The IRS
• The SEC
• The CFTC
• State false claims acts

In both cases, the deduction can't be more than the amount of the award or settlement you include in income that year. You can read the full list in 26 U.S.C. § 62.

Do You Pay Taxes on the Lawyer's Share of a Settlement?

Usually, yes. In Commissioner v. Banks (2005), the Supreme Court held that when a recovery counts as income, the plaintiff's income includes the part paid to the attorney as a contingency fee. You're taxed on the full settlement, even on money that went straight to your lawyer.

That's why the above-the-line deduction matters. Here's a $300,000 taxable employment settlement with a 40% contingency fee ($120,000):

Our guide to hourly, flat fee and contingency billing explains how contingency fees are set.

What happens when a claim doesn't qualify?

The 2026 Tax Court case Eiler v. Commissioner (167 T.C. No. 3) shows what happens when a claim doesn't qualify:

• The taxpayers settled Fair Credit Reporting Act claims for $64,750.
• Their lawyers received $60,050, and the taxpayers received $4,700.
• The court held that FCRA claims aren't "unlawful discrimination" under Section 62(e), so the fees couldn't be deducted above the line.
• The IRS determined a tax deficiency of $11,423, on a settlement where the taxpayers kept less than $5,000.

Where Do You Deduct Legal Fees on Your Tax Return?

It depends on who paid and why:

• Sole proprietors and single-member LLCs: Schedule C (Form 1040)
• Rental property owners: Schedule E (Form 1040)
• Farmers: Schedule F (Form 1040)
• Partnerships and multi-member LLCs: Form 1065
• C corporations: Form 1120
• S corporations: Form 1120-S
• Discrimination and whistleblower fees for individuals: Schedule 1 (Form 1040), as an adjustment to income

Business owners don't need to itemize to deduct business legal fees. They're business expenses, not personal deductions.

When can you deduct a lawyer's retainer fee?

A cash-basis business generally deducts legal fees in the year it pays them. A retainer can be different. If you pay an advance retainer that sits in the lawyer's trust account and can be refunded, it may be treated as a deposit until the lawyer earns it. Ask your CPA how to handle large retainers that cross tax years. Our guide on what a retainer fee is explains how retainers work.

How to Keep Legal Fees Deductible

The IRS can deny a deduction if you can't show what the legal fees were for. In the Rosso case (T.C. Memo 2025-115), the Tax Court denied $28,485 in legal fees because the taxpayer couldn't show they were connected to producing income.

To protect your deduction:

• Ask for itemized invoices. Each entry should describe the work, not just "legal services."
• Separate business and personal matters. If one lawyer handles both, ask for separate matters and separate bills.
• Keep engagement letters. They show why you hired the lawyer, which is what the origin of the claim test looks at.
• Pay business legal fees from the business account. This keeps your records clean.

A clear attorney billing statement makes all of this easier for clients and their accountants. That's also why it pays for law firms to bill by matter and write specific time entries.

Frequently Asked Questions About Deducting Legal Fees

Are legal fees tax deductible for individuals in 2026?

Mostly no. Personal legal fees, including tax advice and fees to collect taxable income, are not deductible. The One Big Beautiful Bill Act made this permanent starting in 2026. The main exceptions are attorney fees for discrimination claims and whistleblower awards.

Are attorney fees tax deductible for a business?

Yes, if they're ordinary and necessary business expenses. This includes contracts, lawsuits, collections, employment matters and business tax advice. Fees to buy assets or start a business follow capitalization and startup cost rules.

Are divorce legal fees tax deductible?

No. Legal fees for divorce, separation and custody are personal and not deductible, even if the divorce involves business assets.

Do I pay tax on the part of my settlement that goes to my lawyer?

Usually, yes. If the settlement is taxable, you're taxed on the full amount, including the contingency fee. You can deduct the fee above the line only if the claim involves unlawful discrimination, certain whistleblower laws or another category listed in IRC 62(a)(20) or (21).

Are personal injury attorney fees tax deductible?

No, but damages for physical injuries are generally not taxable either, so most personal injury plaintiffs don't need the deduction.

Are legal fees to buy property deductible?

No. Legal fees to buy real estate or other property are added to the property's cost basis. They reduce your taxable gain when you sell, or are recovered through depreciation if the property is used in a business.

Can a business deduct legal fees for a lawsuit it lost?

Yes. Business legal fees are deductible whether the business wins or loses, as long as the case relates to running the business.

Do I need to itemize to deduct legal fees?

No. Business legal fees go on your business return or schedule. Qualifying discrimination and whistleblower fees are deducted above the line on Schedule 1. Neither requires itemizing.

This article is general information, not tax or legal advice. Tax treatment depends on your facts, so check with a CPA or tax attorney before filing.