The costs associated with hiring attorneys, defending a case, and paying for damages or a settlement can be exorbitant, and damage a company’s profitability. The good news is these payments are generally tax deductible business expenses.

Can a trust deduct legal fees?

Over the years there has been significant litigation over what expenses are truly considered unique to a trust or estate, and thus are fully deductible. In addition, fiduciary fees, accounting fees, legal fees, and tax return preparation fees have been recognized as fully deductible by trusts and estates.

Can you deduct the cost of a legal settlement?

If you paid the settlement as result of a tax-deductible expense, such as unpaid wages or past-due rent, the settlement is tax deductible. If you paid the settlement as result of a nondeductible expense, such as a personal injury lawsuit or a government fine, you can’t deduct the settlement.

How does it work to settle a tax dispute with an employer?

For example, consider when an employer agrees to allocate $5,000 towards an employee’s legal bill (inclusive of HST – i.e. $4,424 being legal fees and $576 being HST) as part of a settlement. As a result, the employer will receive an ITC of $576 which can then be used to offset future HST payable.

What makes a business settlement a tax deductible expense?

In order for settlement costs to be deductible business expenses, the origin of the claim must arise from a profit-seeking business activity. Had the CEO and employees been away for a board meeting, the outcome may have been different.

When are legal fees not deductible on income?

When legal fees are incurred and produce a damage award that is excluded from income (such as due to the application of Sec. 104), the fees are not deductible. Sec. 265 denies deductions for items allocable to tax-exempt income.