From time to time, Real Estate Agents require the assistance of a lawyer or other professionals. Legal services may be necessary to address a variety of issues beyond title searches and real estate closings. Lawyers can review and create contracts and leases for realtors and their clients. They also provide valuable advice on topics ranging from an agent’s business structure, to litigating boundary disputes, to helping agents and their clients navigate HOA regulations. Real Estate Agents also hire an assortment of other professionals whose specialized skills help achieve their goals.
Deduct Legal and Professional Services on Line 17 of Schedule C. At first glance, the title of the line; Legal and Professional Services, makes the deduction pretty straightforward, right? Well, by now – if you’ve read any of our other Schedule C articles – the title of a line often has very little to do with the expense reported there. This article will help you understand what is and is not deductible on Line 17, Legal and Professional Services.
Deducting legal services on Schedule C is relatively simple. If business-related, they are reported on Line 17. Deductible legal fees include those paid for services related to a client’s property (for example, to resolve an unexpected title search issue just before closing on a sale) unless the fee is reimbursed by their client.
Fees Must Be for Business: Many business owners have one attorney who provides legal services related to both personal and business issues. Only services directly related to the owner’s business are deductible as a business expense. To keep these expenses deductible and above IRS scrutiny, have your attorney bills separately for personal and commercial work and specify business services on the invoice.
Similarly, an agent who is also a landlord or investor should ask their attorney to bill separately for services related to rental or investment properties. Such fees may also be deductible, but not on Schedule C.
Startup & Organizational Legal Fees: Legal fees incurred before formally going into business may be deductible as Startup and Organizational Expenses, but not as legal fees. Although such expenses are relatively rare for a Real Estate Agent, we discuss the issue briefly in our article Real Estate Agents: Are License Training and Exam Fees Deductible?
If you think about it, most successful real estate agents work with a team of specialists. They follow the Golden Rule of Business and focus their limited time on what matters: 1) Making current customers happy, and 2) Getting new customers. They maintain focus by delegating activities that are not the best use of their skill and time to individuals who specialize in completing those tasks. That is to say; they hire professionals.
Professional Service Confusion: Most of us consider someone possessing specific expertise to be a professional. Heating and air conditioning specialists repair HVAC systems, HTML experts design and operate websites, automotive professionals fix vehicles, architects design homes and commercial space, engineers make sure buildings and bridges do not collapse, actuaries work with retirements and pensions, computer pros fix laptops, tax specialists prepare and consult on taxes, and experienced trainers provide continuing education.
These examples illustrate the challenge of completing Line 17 Legal and Professional Services. Many services considered professional are not reported on Line 17. Real Estate Agents who prepare their own returns are surprised to learn how few services get dropped on Line 17. Most get reported elsewhere.
The Key: “What was the Service For?” Perhaps the easiest way to determine where to deduct a professional’s service is to ask yourself, “Why did you hire” the professional? What was the purpose of the work they completed? The answer should point to the proper deduction line. When it doesn’t, report the expense on Line 17.
Here are a few examples of how asking “why” can point to where an expense gets deducted:
- If you hire a web designer to share listings and advance your public profile, their professional service is an Advertising Expense, Line 8.
- Hiring a contractor to fix your office HVAC would be a Repairs and Maintenance Expense, Line 21 (unless it’s for your home office – then it’s reported on Form 8829).
- A mechanic repairs your business vehicle – Car and Truck Expenses, Line 9.
- Removing a virus from the office computer – Office expense, Line 18 (or, arguably, Repairs and Maintenance, Line 21).
By consistently asking “why,” an agent can drill down on the best place to deduct services. What they will also discover is that, ironically, few professional fees get deducted as professional services. Here are some Line 17 deductions:
- Accounting & Bookkeeping
- Tax Preparation & Consultation: A sole proprietor Real Estate Agent files Schedule C, which gets attached (with many other forms and schedules) to Form 1040. To ensure you can deduct tax preparation fees as a business expense, have your preparer bill separately for the business return or itemize its cost on a combined invoice so you can deduct the business portion.
- Tax Representation related to business tax issues
- Business Portion of Tax Software: Agents who prepare their tax returns can deduct a portion of any off-the-shelf tax software. Be careful to make a sensible allocation of the business vs. personal cost. The IRS will not allow 100% of the price if your return consists of more than a Schedule C and forms related to it. Note – one could also argue that this cost is deductible as an Office Expense.
- Business Consultants and Coaches: Deduct the cost of professionals helping you grow your overall business on Line 17. However, if the consultant or coach specializes in a particular area such as advertising or office organization, these fees would be deductible as advertising and office expenses, respectively. Also remember that services purchased before going into business get amortized as Organizational and Startup Expenses. Professional training required to sit for the Real Estate Exam is not deductible.
- Virtual Professional Assistant: An agent who hires a virtual assistant to help with multiple facets of their business (not just office work, which would be an office expense), these fees would be deductible as a professional service.
Legal and professional costs are, by definition, services provided by individuals. Payments for such services may require the completion of Form 1099-MISC, informing the payee and the IRS of the income. Keep this in mind because failing to file required Form 1099-MISC can result in severe penalties. To learn more about Form 1099-MISC Penalties and two seemingly-innocent 1099-related questions added to all business returns a few years ago, check out our article, The 1099 Perjury Trap, The Not-So-Secret Penalty Escalator.
Take Away: Real Estate Agents deduct business-related legal and some professional services on Line 17 of Schedule C. Legal Fees are a relatively straightforward deduction. The term Professional Services, however, is a misnomer since most professional services are deductible elsewhere on Schedule C. The most common exception deducted on Line 17 are fees related to accounting and tax preparation.
Summary and Invite: We hope this article has provided some insight into deducting legal and professional services on Schedule C. If you’d like to learn more about cutting your most significant expense, TAXES, check out our Real Estate Agent Tax Cut Library. The Real Estate Agent Tax Cut Library includes over eight hours of video broken into twenty-nine searchable volumes and covers every possible deduction a Real Estate Agent can take on their tax return. Our Broker Version will help your entire agency cut their taxes! We also invite you to browse our courses.