Deduct Your Tax Return Preparation Fees Against Your Business Income

Many people cannot deduct their tax return preparation fees because the fees are miscellaneous expenses. Miscellaneous expenses are deductible as itemized deductions to the extent they exceed 2% of your adjusted gross income (AGI). However, if you are in business for yourself, a major portion of your tax return preparation fees may be deductible against your business income. You can deduct the tax preparation fees for the following:

Your business (Schedule C)

Your rental properties (Schedule E)

Your farm (Schedule F)

Ask your tax professional how much of the fee relates to these items. Deduct that amount on those specific forms. Allocating these fees saves you income taxes since it reduces your AGI which you use to compute several limitations on itemized deductions. This allocation also saves you self-employment tax if it relates to your business or farm.

In 2012 you have $55,000 in business income, your spouse has $20,000 in wages, and you pay $1,200 for the preparation of your tax returns. Only your itemized deductions over $1,500 ($75,000 x 2%) are deductible. If your tax return preparation fee is your only miscellaneous itemized deduction, you get no tax deduction for the fees you pay. However, if your tax return preparer allocates 75% of the fee to your business, you can deduct $900 ($1,200 x 75%). This will save you about $345 in tax.

Savings of self-employment tax:

      Amount of deduction                              $900

      Self-employment tax rate                      x 13.3%

      Savings of self-employment tax                                    $120

Savings of income tax:

     Amount of deduction                              $900

     Tax rate                                                   x 25%

     Savings of income tax                                                      225

Total savings                                                                       $345

Furthermore, if the Internal Revenue Service audits your tax return, and the main focus is your business, you can deduct your accountant’s fees. Also, if you receive any governmental notices concerning your business, you can deduct the fees you pay your accountant to resolve the matter.

Julie Welch (Runtz) is the Director of Tax Services for Meara, King & Co. She graduated from William Jewell College with a BS in Accounting and obtained a Masters in Taxation from the University of Missouri-Kansas City. She serves as a discussion leader for the AICPA National Tax Education Program. She is co-author of 101 Tax Saving Ideas.