When preparing personal and business taxes, you probably hire an accountant to save time and minimize all-around tax payments. When hiring a qualified accountant, you may wonder if tax preparation fees are deductible. It is important to understand when tax preparation fees and costs are deductible as this is a benefit that is not currently available in all situations.
Although these expenses are not deductible in all cases, it is recommended that you work with a professional and qualified accountant to prepare your taxes. A trained accountant will find deductions, credits, and benefits that will optimize your tax bill to the minimum. This way, you will be able to save a significant amount of money and ensure that your taxes are filed correctly and on time.
Personal tax preparation fee deduction
The 2017 Tax Cuts and Jobs Act (TCJA) eliminated most itemized tax deductions, such as medical expenses, moving expenses, unreimbursed work expenses, and tax preparation fees. If you are an employee, you cannot deduct expenses associated with tax preparation.
However, if you are self-employed, you can claim a deduction for your accountant’s fees for tax preparation. You are eligible for this deduction if you are a business owner and sole proprietor. Likewise, statutory employees, independent contractors such as drivers distributing certain products or services, and life insurance sales agents are eligible to receive this tax benefit.
On the other hand, it is important to recognize that this law reduced individual deductions and significantly increased the standard deduction. So if you are an employee, you should not worry too much about the reductions in personal tax payments since most people benefit greatly from the standard deduction that everyone is eligible for.
Fee deduction in business tax preparation
In the case of business owners, the tax preparation fee is considered a necessary expense for their business operation, so it is possible to deduct it from business tax bills. It is important to note that your accountant will most likely be unable to knock off the entire cost of preparing your business taxes. You will only be able to deduct the amount of the fee that corresponds to the preparation of your business taxes.
Sole proprietorships, farmers, independent contractors, self-employed individuals, and individuals who receive money from leasing property, among others, may be able to receive this benefit by completing the appropriate form. Suppose you are unsure whether you fall into one of these categories. In that case, it is best to consult a professional accountant to ensure that your taxes are filed correctly and avoid penalties.
Which tax preparation fees are deductible?
If you are a contractor, business owner, or self-employed and are eligible for the tax benefit these are the costs you can deduct:
- Tax preparation software
- Consultation fees with a professional accountant
- Tax preparation fees by a qualified accountant
- Electronic tax filing fees including credit card fees
- Legal fees and representation
However, you should be aware that an accountant may charge you $500 for doing your tax preparation and you will only be able to claim the portion of the fee that corresponds to schedules C, E, and F, i.e., the business portion of your taxes. Everything else will go into the personal taxes, where they are nondeductible.
How to claim a tax preparation deduction
When preparing each of the schedules for the tax deduction, you must consider in which cases each program is used and what information must be present on the form.
Schedule C
Schedule C includes fees for legal and professional services. Schedule C may include any expenses you have if you have to resolve a tax dispute with the IRS about your business taxes.
Schedule E
Schedule E is for supplemental income and losses; this form covers various tax situations, such as rental property or royalty income. You can deduct tax return preparation expenses related to these gains and tax advice directly related to this type of income.
For this deduction, you and your accountant must consider several conditions regarding property rentals:
- If you lived during the year in a property you rent out for profit, you could only deduct all of your expenses if you used the home for 14 days or less.
- Your accountant must itemize the business-related tax preparation costs and determine what percentage of costs are deductible if you lived in a rental property during the year.
- When the property was unoccupied for a period, you can only deduct what corresponds to 10% of the time it was rented.
- It is also important that the rental price is fair rental price to apply for the benefit.
Schedule F
This schedule is used for farming profits or losses. Tax preparation fees for farmers must be submitted on this form. The IRS requires an itemization of expenses that are recorded as tax filings. As mentioned above, tax costs must be related to your farming business, not personal taxes.
All tax preparation fees qualify in all cases eligible for deductions, whether you pay a flat price, a percentage of your tax refund, or whatever type of accounting fee.
References:
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“Can You Deduct Your Tax Preparation Fees | CPA News.” C. E. Thorn, CPA, PLLC, 17 May 2021, https://www.carsonthorncpa.com/news/can-i-deduct-my-tax-preparation-fees.