Hiring an accounting firm is a big decision for any small business. Every dollar counts when you’re juggling expenses and trying to keep the business growing. When you hear that accounting fees might be tax-deductible, that sounds like a win. But with tax laws constantly changing, it’s easy to get confused about what you can and can’t deduct.
Understanding how accounting fees affect your tax deductions makes that decision a lot easier. Knowing which business expenses you can write off could save you a significant amount of money at tax time. Let’s make sure you’re not leaving any valuable deductions on the table.
The Basics: Are Accounting Fees Tax Deductible?
In short, yes, accounting fees for business-related services are generally tax-deductible. The IRS allows businesses to deduct “ordinary and necessary” expenses. This rule falls under Section 162 of the tax code, which covers common business expenses, including accounting fees.
What does “ordinary and necessary” mean? An ordinary expense is common and accepted in your business, while a necessary expense is one that is helpful and appropriate for your trade. Accounting services are crucial for keeping financial records, managing payroll, and preparing tax documents, and usually fit into both categories.
Deducting these fees, reduces your taxable income, which could lower your taxes. There are some rules to keep in mind, however.
What Types of Accounting Fees are Deductible?
Not every type of accounting fee is treated the same for taxes. Here are common accounting services that you typically can deduct:
- Financial Statement Preparation: If you pay and accountant to create financial statements, those fees are deductible too. The IRS allows you to deduct these costs because these statements are crucial for understanding your business’s health and making strategic decisions.
- Business Advice and Tax Planning: A good accountant will include tax planning in your service agreement. While not every business take advantage of this, the IRS considers these services ordinary and necessary.
- Bookkeeping and Payroll Services: If you pay a bookkeeper or use an accounting firm to manage your payroll, those fees are deductible. Keeping accurate financial records is essential to your business, and the IRS recognizes that cost as “ordinary and necessary” expenses.
- Tax Preparation and Filing: The cost of preparing and filing your business tax return can be deducted. This includes fees paid to your CPA or accountant for business-related tax services. It’s a direct expense of running your business, so take full advantage of this deduction.
Note that personal accounting fees are generally not deductible. This includes the fees for preparing your individual tax return that are unrelated to your business. The Tax Cuts and Jobs Act of 2017 eliminated the deduction for personal tax preparation services on individual tax returns. Only accounting fees directly related to business operations are deductible. Stay out of trouble with the IRS by not deducting your personal tax preparation.
Common Myths About Accounting Fee Deductions
The tax rules for deducting accounting fees are pretty straightforward, but some myths still cause confusion. Let’s clear up a few of these misconceptions so you can confidently handle your deductions.
Myth 1: “You can only deduct accounting fees if your business is profitable.”
False! Even if your business operates at a loss, you can still deduct accounting fees. Why? Because accounting services are an “ordinary and necessary” business expense under IRS guidelines. In fact, accurately tracking your financials is even more important when your business isn’t profitable because it helps you identify areas where you might cut costs or improve cash flow. While there are a few interesting exceptions, don’t hesitate to claim deductions for accounting, regardless of how your business performed during the year.
Myth 2: “The IRS scrutinizes accounting fee deductions.”
False! Properly documented accounting fees are generally not a red flag. The IRS expects businesses to incur costs for accounting and financial management. Keep accurate records and show that the fees were for business-related services and you should have no problem if your return gets reviewed. Of course, it’s always wise to consult with a CPA to make sure you’re following the rules correctly.
How to Properly Deduct Accounting Fees
Now that you know which accounting fees are deductible and have cleared up some common myths, let’s go over how to correctly claim these deductions. Here’s a simple step-by-step guide:
Step 1: Keep Detailed Records of All Accounting Fees Incurred
The most crucial step is to keep detailed records of every accounting service you pay for. Save invoices, receipts, and any contracts or agreements with your accountant. Note the specific services provided, whether it’s bookkeeping, tax preparation, or payroll management. This documentation will help you at tax time and serve as a safety net if you’re audited by the IRS.
Step 2: Use the Appropriate Tax Forms for Deductions
The next step is to report these expenses on the right tax forms, which depends on your business structure:
- Sole Proprietors and Single-Member LLCs: List your accounting fees on Schedule C (Form 1040) under “Legal and Professional Services.”
- Partnerships: Include accounting fees on Form 1065 under “Other Deductions.”
- Corporations: For C corporations, use Form 1120, and for S corporations, use Form 1120-S. In both cases, accounting fees go under “Other Deductions.”
By using the right forms, you ensure that the IRS sees these fees as legitimate business expenses.
Step 3: Include Accounting Fees as “Legal and Professional Services” on Your Tax Return
You’ll typically list accounting fees under “Legal and Professional Services” when filling out your business tax return This category covers costs related to running your business, including accounting, legal advice, and even consulting services. Tally up the total accounting fees you’ve paid throughout the year so you can accurately report them.
Conclusion
Understanding which accounting fees are deductible is a simple yet powerful way to maximize your business’s tax savings. By knowing the facts and debunking the myths, you can ensure you’re claiming all the deductions you’re entitled to. From bookkeeping to tax planning, these “ordinary and necessary” expenses are crucial for running your business smoothly—and the IRS recognizes that.
What’s your next step? Book a discovery meeting! We’ll help you maximize your tax savings and grow your business. Don’t leave money on the table—let’s work together to make the most of every business dollar.