Posted by Raven Skylar Tax & Consulting, LLC

Tax Preparation Fee Deduction: Who Can Claim It?

Tax Preparation Fee Deduction: Who Can Claim It?

In the past, taxpayers could deduct the costs of preparing tax returns by itemizing their deductions, but the tax break disappeared in 2018 after the TCJA came into force.

Admittedly, it was not a big deduction. Itemizing this meant filling out Schedule A with the income tax return and waiving the standard deduction, which TCJA more or less doubled. And it fell into the category of various deductions, so you can only deduct expenses that exceed 2% of adjusted gross income (AGI). However, some taxpayers may still claim tax preparation fees and are not subject to these restrictive rules.

The TCJA potentially expires at the end of 2025, so this provision may revert to the tax code in 2026 if Congress does not renew the legislation.


Who Can Deduct Tax Preparing Taxes?

Only the self-employed can claim a deduction for tax preparation expenses in fiscal 2018 and beyond. This means it must be one of the following:

  • A sole proprietor who files Schedule C with his return

  • A farmer filing Schedule F with his income tax return.

  • Someone who earns income from rental property or royalties and declares that the income on Schedule E.

Statutory employees can continue to claim this expense on Schedule C. Statutory employees are effectively self-employed but can be treated as employees for tax purposes. They include:

  • Drivers who distribute certain foods or drinks in addition to milk and who receive a commission.

  • Drivers who find or deliver laundry or dry cleaning services and receive a commission

  • Full-time travelers or local salespeople, if this is your main source of income.

  • People who work remotely from their home provided that the employer dictates their duties and provides their supplies.

  • Life insurance sales agents

Talk to a tax expert if you think you might fall into any of these categories because the rules are complicated.


What part of the taxes is deductible?

The next hurdle is figuring out exactly how much tax preparation fees you can deduct. You are covered by the costs of meeting with a tax professional for advice, as well as having them prepare your tax return. You are also covered if you choose to use tax preparation software. Legal fees and audit representation are considered deductibles, as are any publications or books you might purchase to better understand your tax situation and even the cost of electronic filing.

However, you may not be able to deduct all the expenses. An expert can charge you $500 to prepare your income tax return, but you can only claim the portion of the commission that goes towards preparing your Schedule C, E, or F; that is, the business part of your taxes, everything else falls under the miscellaneous personal expense category, so it's no longer tax-deductible.

You have to deduct these tax preparation fees and expenses in the same tax year you pay them.


How to claim a deduction for tax preparation

Tax preparation fees are deductible on Schedules C, F, and E because they are considered "ordinary and necessary" for the operation of your business.


Claiming the deduction in Schedule C

These fees are "legal and professional services" in Schedule C. This is line 17 of Part II of the schedule, called "expenses." Additionally, they can include anything you need to spend to resolve a tax dispute with the IRS regarding your business's gains or losses.


Claiming the deduction on Schedule F

Schedule F is titled "Farm Gains or Losses." Tax preparation fees are included in this form's "other expenses" category, which appears on lines 32 a) through f). The IRS wants you to clarify what these line charges were used for. For example, you can enter "tax preparation expenses" on line 32a and "office expenses" on line 32b. Again, these tax costs should relate directly to your farm, not your tax issues.


Claim the deduction on Schedule E

Schedule E refers to "additional income and losses" and covers a wide variety of tax entities and situations, including income from the rental of real estate or the collection of royalties. It is possible to deduct the cost of preparing a tax return for any of these income sources. Still, again, it is not possible to deduct the cost of preparing the entire tax return. . You can only claim the cost of preparing this and other related schedules or tax advice on matters directly related to these receipts.

This can be a bit tricky if you are a homeowner and have lived in person or used part of your property during the fiscal year. Not only do you divide your tax preparation costs related to your business, but you or your tax professional must also determine the percentage of your deductible business expenses. You can only deduct all expenses if you have used your home or accommodation for 14 days or less, or 10% of the time it was rented to a third party if it has been vacant for some time. You must also have rented at the right market value.

You can claim expenses related to rental income tax or royalties in Part I of Schedule E, per these rules. On this schedule, these are "legal, and other professional fees" and are entered on line 10.


What about state returns?

The IRS also covers state tax return preparation and state tax matters. This deduction is available for all taxes, as long as those taxes are associated with your business. The same goes for any local taxes you might face. You can deduct them based on these rules and guidelines if you have spent money on your business.

When it comes to tax deductions for preparing tax returns, ask your local tax agent such as RAVEN SKYLAR TAX & CONSULTING, LLC. to determine what applies in your state. The tax process can vary widely from state to state; some do not collect income tax, and one state, New Hampshire, only taxes dividends and interest until 2025. Several states may or may not offer this deduction.


FOR MORE INFORMATION ON HOW WE CAN BEST HELP YOU WITH YOUR TAX FILING NEEDS, PLEASE CLICK THE BLUE TAB ON THIS PAGE.


THANKS FOR VISITING.

Raven Skylar Tax & Consulting, LLC
Contact Member