Can I Deduct Attorney Fees on My Tax Return? Business vs. Personal

You can deduct attorney fees on your taxes when they come from running a business or from a qualifying discrimination or whistleblower claim; almost every other kind of legal fee is nondeductible for individuals. Business owners write off legal costs on Schedule C. Employees who win discrimination or retaliation cases, and people who receive IRS or SEC whistleblower awards, take an above-the-line deduction on Schedule 1. Legal fees for personal matters, investment disputes, and personal tax fights produce no tax benefit, and a change Congress made permanent in 2025 keeps it that way for 2026 and beyond.

Business Legal Fees

If you operate a business as a sole proprietor, legal fees tied to that business are deductible as long as they qualify as ordinary and necessary expenses. That standard comes from the tax code’s general rule for business deductions and covers a wide range of work: drafting or reviewing contracts, resolving disputes with customers or vendors, handling employment issues, collecting unpaid invoices, negotiating leases, and defending lawsuits that arise from your business activities.¹

These fees go on Schedule C (Form 1040), Line 17, the line designated for legal and professional services. The IRS instructions for that line also let you include fees for tax advice and tax return preparation connected to the business, as well as the cost of resolving tax disputes about your business income.²

The requirement is a direct connection between the legal work and business operations. Fees that benefit both your business and personal life have to be split, and only the business portion goes on Schedule C. If your lawyer handles a contract dispute and a personal matter under the same engagement, ask for an itemized bill separating the two.

Partnerships, S corporations, and C corporations deduct business legal fees on their own entity returns rather than Schedule C, but the underlying rule is the same: the expense must be ordinary and necessary for the business.

Discrimination and Whistleblower Claims

Even if you have no business, you can deduct attorney fees and court costs connected to certain employment and civil rights claims. These come off your income as an adjustment on Schedule 1 (Line 24h), so you get the deduction whether or not you itemize.³

The qualifying claims include:

Employment discrimination under Title VII of the Civil Rights Act, the Americans with Disabilities Act, the Age Discrimination in Employment Act, and the Fair Housing Act
Wage and labor violations under the Fair Labor Standards Act, the National Labor Relations Act, and the Family and Medical Leave Act
Federal whistleblower protection provisions and claims under state or federal laws prohibiting retaliation against employees
Civil rights actions under 42 U.S.C. §§ 1981, 1983, or 1985, and any federal, state, or local law enforcing civil rights or regulating the employment relationship

The deduction cannot exceed the amount you include in income from the judgment or settlement that year. Win a $200,000 discrimination judgment and pay $80,000 in attorney fees, and you deduct the $80,000 on Schedule 1 while reporting the full $200,000 as income. The net effect is that you’re taxed only on the $120,000 you kept.⁴

A separate provision covers IRS and SEC whistleblower awards. If you receive an award for reporting tax fraud to the IRS or securities violations to the SEC, the attorney fees you paid to obtain the award are deductible above the line on Schedule 1 (Line 24i), subject to the same cap: the deduction can’t exceed the award amount included in your income that year.⁴

Personal and Investment-Related Legal Fees

Legal fees for personal, living, or family matters are not deductible. The tax code’s baseline rule is that personal expenses generate no deductions unless a specific provision says otherwise. Divorce proceedings, child custody disputes, personal injury lawsuits, estate planning, real estate closings on your home, immigration matters, and drafting a will all fall on the nondeductible side.⁵

Before 2018, individuals could deduct a broader range of legal fees as miscellaneous itemized deductions on Schedule A, subject to a 2% of adjusted gross income floor. That category covered legal costs for managing investments, collecting rental income outside a trade or business, fighting over alimony, and handling personal tax disputes. The Tax Cuts and Jobs Act suspended those deductions for 2018 through 2025, and many taxpayers expected them to return in 2026. They will not. Congress passed legislation in 2025 that made the suspension permanent by removing the 2025 expiration date.⁶

For 2026 and beyond, no miscellaneous itemized deduction exists for any legal fee, no matter how directly it connects to income-producing activity, unless it qualifies under one of the specific categories above. The main casualties:

Investment-related legal fees, including disputes over brokerage accounts, partnership interests, or investment fraud
Nonbusiness tax disputes, meaning fees paid to a tax attorney fighting the IRS over personal income tax issues rather than business tax issues⁵
Legal costs incurred by a beneficiary in disputes over estate distributions

One carve-out matters here. Legal fees for tax issues tied to business income reported on Schedule C, rental income on Schedule E, or farm income on Schedule F can still be deducted on those schedules. The suspension applies only to miscellaneous itemized deductions, not to business-related legal costs.⁵

Criminal Defense Fees

The blanket claim that criminal defense fees are never deductible is wrong. The IRS specifically allows deduction of legal expenses for defending against criminal charges that arise out of your trade or business. When a business owner faces charges related to business conduct, such as regulatory violations, tax fraud allegations tied to the business, or industry-specific criminal statutes, the defense costs are deductible as business expenses.⁵

Charges rooted in personal conduct remain nondeductible. The dividing line is the origin of the charges, not the outcome. A DUI defense is personal. A defense against charges of fraudulent business billing practices is business-related and deductible.

Fines, Penalties, and Government Settlements

You cannot deduct amounts paid to a government for violating any law, and that prohibition extends to settlement payments resolving potential liability for fines or penalties. The rule covers parking tickets, civil penalties, and criminal penalties alike.¹

Amounts that constitute restitution for actual damage caused by the violation, or amounts paid to come into compliance with the law, can be deductible, but only if the settlement agreement or court order specifically identifies them as restitution or compliance costs. Reimbursing the government for investigation or litigation costs is always nondeductible, even if labeled as something else.⁵

Legal Fees That Must Be Capitalized

Not every business-related legal fee gets deducted in the year you pay it. Some must be capitalized, added to the cost basis of an asset rather than written off as a current expense. Capitalized costs reduce your taxable gain when you eventually sell the asset, but they don’t produce an immediate deduction.

Legal fees that defend or perfect your title to property must be capitalized. If you hire a lawyer to fight a boundary dispute over rental property, clear a lien, or resolve a title defect, those costs increase your basis in the property.⁷

Legal costs for acquiring assets get the same treatment. Fees for negotiating a purchase agreement, conducting due diligence on an acquisition, or drafting transfer documents are added to the asset’s cost basis. The same goes for legal work connected to increasing a property’s value or extending its useful life; those costs are added to basis and recovered through depreciation.⁵

Startup Legal Costs

Legal fees you incur before your business actually begins operating get special treatment. The tax code lets you deduct up to $5,000 in startup expenditures, including legal fees for forming the business, drafting initial contracts, and reviewing leases, in the year the business launches. That $5,000 allowance phases out dollar for dollar once total startup costs exceed $50,000.⁸

Any startup legal costs above the $5,000 threshold, or above zero if total startup costs exceeded $55,000, must be amortized over 180 months starting with the month the business opens. This amortization deduction shows up on your return each year until the full amount is recovered. The election to deduct startup costs is generally made on the first return filed for the business.

Settlements and Contingency Fees

Settlement proceeds carry different tax consequences depending on the type of claim, and the tax treatment of the settlement controls whether the legal fees are deductible.

Damages for personal physical injuries or physical sickness are excluded from gross income entirely. The exclusion covers compensatory damages, including lost wages, as long as they stem from a physical injury or illness. Emotional distress damages do not qualify for the exclusion unless they reimburse actual medical expenses.⁹ Because the settlement itself is tax-free, the legal fees are not deductible; there’s no income to offset.

For taxable settlements involving employment disputes, breach of contract, or business torts, the full settlement amount is income. If the claim is business-related, the fees are deductible as business expenses. If it involves discrimination or whistleblower protections, the above-the-line deduction applies. Other taxable settlements that don’t fit a business or statutory category fall into the now-permanently-suspended miscellaneous itemized deduction bucket and produce no tax benefit at all.

Punitive damages are always taxable income, regardless of the underlying claim. Even in a personal injury case where the compensatory damages are tax-free, any punitive damages award is fully taxable.¹⁰

The Contingency Fee Problem

If your lawyer works on contingency and takes a percentage of the recovery, you still owe tax on the full settlement, including the portion your lawyer keeps. The Supreme Court settled this in 2005, holding that a contingency fee is an anticipatory assignment of income: you retain ownership of the legal claim, and the lawyer acts as your agent. The full recovery is your income first, and the attorney’s cut is a payment you made out of that income.¹¹

The result is brutal in cases where the fees aren’t deductible. Settle a non-physical-injury personal claim for $500,000 with the lawyer taking $200,000, and you report $500,000 as income with no deduction for the $200,000 that went to counsel. You’re taxed on money you never touched. The above-the-line deduction for discrimination and whistleblower claims was created specifically to fix this problem for those case types; it does not help with other categories.

The Origin of the Claim Test

When legal fees don’t fall neatly into one category, the IRS and courts use the “origin of the claim” test. It looks at the transaction or activity that gave rise to the legal issue, not the consequences of the lawsuit or its potential impact on your finances.

A business owner going through a divorce may hire a lawyer who ends up fighting to protect business assets. The fees might seem business-related because the business is at stake, but the origin of the claim is the divorce, a personal matter. Those fees are nondeductible, regardless of the business consequences.

The test works the same way for capitalization questions. Legal fees for a lawsuit that started because someone challenged your ownership of rental property get capitalized into the property’s basis, even if the lawsuit also caused you to lose rental income. The origin is the property title dispute, so the fees follow the property.

When a single legal engagement produces work with multiple origins, the fees have to be allocated based on the specific work performed. Itemized billing from your attorney is essential here. A detailed invoice that breaks out hours by task lets you assign each portion to the correct tax treatment. A flat-fee or lump-sum bill leaves you guessing, and the IRS will default to nondeductible if you can’t demonstrate the allocation.

Records to Keep

The IRS won’t take your word that a legal fee was business-related. You need documentation that connects each payment to a deductible activity, and the time to build the paper trail is when the legal work is happening.

For every engagement you plan to deduct, keep:

The engagement letter describing the scope of work and establishing the business purpose
Itemized invoices that break out time by task, so deductible work can be separated from personal or capital items
Payment records such as canceled checks, credit card statements, or wire transfer confirmations
Correspondence that demonstrates the business connection, particularly useful when the purpose isn’t obvious from the invoice alone

If your legal work involves mixed-purpose billing, ask your attorney at the start of the engagement to track time separately for business, personal, and capital items. Most attorneys can do this with a matter code in their billing software, and it saves you from trying to reconstruct the split later. The IRS is far more likely to accept an allocation your attorney documented in real time than one you created retroactively on your return.

Retain all legal fee documentation for at least three years after filing the return on which you claim the deduction. If the deduction is large relative to your income, keep it for six years; the IRS has an extended statute of limitations when unreported income exceeds 25% of what was reported on the return.

1
Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses
2
Internal Revenue Service. Instructions for Schedule C (Form 1040)
3
Internal Revenue Service. 2025 Schedule 1 (Form 1040)
4
Office of the Law Revision Counsel. 26 US Code 62 – Adjusted Gross Income Defined
5
Internal Revenue Service. Publication 529, Miscellaneous Deductions
6
Office of the Law Revision Counsel. 26 US Code 67 – 2-Percent Floor on Miscellaneous Itemized Deductions
7
Internal Revenue Service. Publication 551, Basis of Assets
8
Office of the Law Revision Counsel. 26 US Code 195 – Start-up Expenditures
9
Office of the Law Revision Counsel. 26 USC 104 – Compensation for Injuries or Sickness
10
Internal Revenue Service. Tax Implications of Settlements and Judgments
11
Cornell Law School. Commissioner of Internal Revenue v. Banks