It’s that time again…time to prepare your taxes. Most of us don’t relish spending hours preparing information and completing forms to send to the IRS. Whether you have personal and/or business tax preparation, perhaps you are considering turning the task over to an accountant this year to save your time. If so, you may be wondering about the cost of tax preparation fees when you outsource your tax preparation needs. You may also be wondering if you can deduct the cost of tax preparation fees. In this article, our small business accounting firm in Raleigh takes a closer look at this topic so you can make the right choice for your situation.
Taxpayers used to be able to deduct costs associated with preparing tax returns if they itemized their deductions, but that tax break went away for most people beginning in tax year 2018. According to the IRS, as was established in the Tax Cuts and Jobs Act (TCJA) that Congress signed into law on December 22, 2017, unless you are self-employed, you aren’t able to deduct personal tax preparation fees. This has been the case since tax year 2018 and applies through tax year 2025.
In other words, if you are a W-2 employee, you can’t take a tax deduction on any costs incurred for preparing your tax return. The positive side of losing many of the itemized deductions in the TCJA is that Congress did increase the standard deduction for personal taxes. Note that, if you are a business owner or self-employed, you can usually still claim a deduction as a business expense. We’ll explain more about this next.
Tax preparation is considered an “ordinary and necessary” expense for business owners and self-employed individuals. If you are a sole proprietor, you are eligible for this deduction and can claim it on Schedule C. Additionally, if you are a statutory employee, you can continue to claim this expense on Schedule C. According to the IRS, a statutory employee is an independent contractor under the common law rules.
A statutory employee can deduct the cost of tax preparation fees, including tax software or fees from professional accounting services. To do so, you must fit the following criteria:
Other workers who are eligible to deduct preparation fees are:
Your federal tax preparation fees can be deducted from your federal income taxes and your state tax preparation fees can also be deducted from your state taxes.
You may not be able to deduct the entire cost of the tax preparation fees. In general, the IRS will cover these expenses:
You can only claim the amount of the fee accrued in preparing the business portion of your taxes. The entire amount for the fees directly related to your business’s tax preparation is defined as “ordinary” and “necessary.” In effect, the portion of the fee that is attributable to preparing Schedule C, E, or F can be deducted. Standard deductions, personal deductions, and credits are part of personal miscellaneous expenses and are not included in the tax preparation deduction.
The tax deduction for preparation costs and fees is taken in the same tax year as when you pay them. For example, if you pay to have your 2023 taxes prepared in the year 2024, then you take the deduction for tax year 2024.
Tax preparation fees are “legal and professional services” on Line 17 in Part II on Schedule C, labeled “Expenses.” Additionally, they can include anything you may have to spend to resolve a tax dispute with the IRS over your profit or loss from business.
Schedule F is used for “Profit or Loss from Farming.” Tax preparation fees are “other expenses” on Lines 32. You should break down the expenses and what they were for on the lettered lines. These tax costs must directly relate to your farming business, not personal tax issues.
Schedule E is used for “Supplemental Income and Loss,” covering a wide variety of tax situations, including income from rental real estate or collecting royalties. You can only claim the cost of preparing this portion of your tax return, not the entire tax return. It gets a bit complicated if you are a landlord and lived in or used any of your properties personally during the tax year. In this case, you need to determine the percentage of your business costs that is deductible. You are only able to deduct all of your expenses if you personally used the rental for 14 days or less, or 10% of the time it was rented to others. And, you must have rented it at fair market value.
As a business owner or statutory employee, you can also deduct your tax preparation fees on state tax returns. This deduction covers all things that are tax-related as associated with your business. We recommend checking with a tax professional to find out the specifics of your state.
Even though your business tax preparation costs may not be fully deductible, it’s still important to work with a CPA who can prepare your tax return. A small business accountant may find additional deductions, credits, and benefits that can minimize your tax bill and ensure they are accurate and filed on time.
Taxes can be complicated and take a great deal of time to get right. Consider working with a local CPA who can prepare your taxes. In addition to monthly bookkeeping services, we prepare taxes for small businesses. Complete our contact form or call our Raleigh office today at 919-420-0092.
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