Are Tax Preparation Fees Deductible?

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Whenever tax preparation time nears, stress starts to build up. Who wants to spend hours and (sometimes) days preparing information and filling out paperwork to send to the IRS? Whether for an individual or a business, many people outsource tax preparation tasks to an accountant to save time and effort. Can you deduct the tax preparation fees? Let’s find out!

Personal Tax Preparation Fees Deduction

 

There was a time when taxpayers could deduct the cost of preparing tax returns by itemizing their deductions. Unfortunately, this stopped in 2018.

According to the IRS, you can’t deduct personal tax preparation fees unless you are self-employed. This was established in the Tax Cuts and Jobs Act, signed into law on December 22, 2017, and applies through tax year 2025.

So, a W-2 employee can not deduct any cost associated with preparing their tax return. However, there’s a good side to it—the standard deduction for personal taxes increased. Whether you are self-employed or own a business, you can claim a deduction as a business expense.

Business Tax Preparation Fees Deduction

Business owners and self-employed individuals—all need tax preparation. A sole proprietor is eligible for this deduction. They can claim it on Schedule C. A statutory employee can continue to claim this expense on Schedule C.

According to the IRS, a statutory employee is an independent contractor under common law, and they can deduct the cost of tax preparation fees, such as fees from professional accounting services or tax software. However, there are a few criteria to be met, including:

  • A sole proprietor who files a Schedule C with your return
  • An individual who earns from royalties and files a Schedule E
  • A landlord who earns from rental properties and files Schedule E
  • A farmer who files Schedule F

Eligibility requirements for tax preparation fee deduction of other workers are:

  • If you’re a life insurance sales agent
  • If you’re a full-time salesperson who earns on a commission basis
  • If you drive for a rideshare or another food delivery service

Your state tax preparation feeds can be deducted from your state taxes and federal tax preparation fees from your federal income taxes.

How Much of Tax Preparation Fees Can Be Deducted?

The entire cost of the tax preparation fees may not be deductible. The IRS will only cover these expenses:

  • Cost of tax preparation software
  • E-filing related fees
  • Fees from your hired accountant incurred for meetings and return preparation

However, you can only claim the amount accumulated in preparing the business part of your taxes. The total amount for the fees directly associated with your business’ tax preparation is defined as ordinary and necessary. The fee amount attributable to preparing Schedule C, E, or F is deductible—excluded are standard deductions, personal deductions, and credits.

How to Claim a Deduction for Tax Preparation Fees

The year is the same for the tax deduction for preparation costs and fees as the year you pay them. If you pay for tax preparation for 2023 in 2024, the deduction will be in 2024.

Claiming the Deduction on Schedule C

If you’re using Schedule C for your business, you can deduct tax preparation fees as “legal and professional services” on Line 17 in Part II under “Expenses.” It includes any costs you incur to resolve a tax dispute with the IRS regarding your business profits or losses.

Claiming the Deduction on Schedule F

For farmers, Schedule F is used to report “Profit or Loss from Farming.” Here, you can list tax preparation fees as “other expenses” on Line 32. Make sure to explain what these expenses were for on the lettered lines.

Note: These costs should be directly related to your farming business, not personal tax matters.

Claiming the Deduction on Schedule E

Schedule E is for reporting “Supplemental Income and Loss,” which can include money from rental properties or royalties. You can only deduct the cost of preparing this part of your tax return, not the entire return.

If you’re a landlord and used any of your rental properties for personal use during the year, things get a bit tricky. You’ll need to figure out what percentage of your expenses can be deducted. You can deduct all your expenses only if you used the rental for 14 days or less or 10% of the time it was rented out. Also, make sure it was rented at fair market value.

State Tax Returns

Business owners or statutory employees can deduct their tax preparation fees on state tax returns. It covers all things tax-related as related to your business. We recommend that you check with a tax professional to find out the specifics of your state.

Do You Need an Accountant for Tax Preparation

It is always good to work with a CPA to prepare your tax return, even though business tax preparation costs may not be fully deductible. Business accountants can identify additional deductions, credits, and benefits that can reduce your tax bill and ensure their accuracy and on-time filing.

For more information, call the experts at Jarrar CPA, and we will provide the assistance you need.