Taxes are an inevitable part of financial life, as are the costs of preparing and filing them. Whether you’re working with a professional tax preparer like The Wonzy Tax Company or using tax preparation software, these expenses can add up. 

Knowing whether these costs are deductible can help you plan your finances and save money.

Are Tax Prep Fees Deductible?

The short answer is: It depends. The tax laws regarding the deductibility of tax preparation fees have changed in recent years. Let’s break it down:

1. For Individuals: Under the Tax Cuts and Jobs Act (TCJA) of 2017, tax preparation fees are no longer deductible for most individual taxpayers through 2025. This includes costs for filing federal, state, and local taxes, even during a specific tax year.
2. For Businesses and Self-Employed Individuals: If you’re a business owner, freelancer, or self-employed individual, tax prep fees remain deductible as a business expense. 

These fees can be claimed on Schedule C (Profit or Loss From Business) or other relevant tax forms. Utilizing this tax deduction can help offset the costs of personal tax preparation and overall financial management.

This breakdown highlights the importance of understanding whether you qualify for a deduction or need to rely on the standard deduction for individual taxpayers.

What Is a Tax Preparation Fee?

Tax preparation fees refer to the costs associated with:

• Hiring a professional tax preparer or accountant.
• Purchasing tax preparation software.
• Filing fees for federal, state, and local tax returns.

These tax preparation costs can vary widely depending on the complexity of your tax situation, the type of services required, and the expertise of your tax professional. Understanding these costs can help you determine whether you are able to deduct them under current tax laws.

Which Businesses Can Deduct Tax Preparation Fees?

Businesses of all sizes can claim tax preparation fees, but the rules differ based on your business structure:

Sole Proprietors and Freelancers

If you operate as a sole proprietor or freelancer, you can deduct tax preparation fees on Schedule C. This includes costs for preparing and filing your business tax returns and any additional accounting services. These deductions may also include fees as a business expense related to return preparation.

Partnerships and Corporations

For partnerships, LLCs, and corporations, tax preparation fees are deductible as a business expense on the respective tax forms, such as Form 1065 for partnerships or Form 1120 for corporations. Businesses may also benefit from professional tax advice to ensure accurate filings.

Trusts and Estates

Tax preparation fees for trusts and estates remain deductible. These are claimed on Form 1041, as they are considered an administrative expense necessary for managing the trust or estate. Keeping track of fees tax for administrative purposes ensures compliance with tax obligations.

Other Fees That a Business Can Deduct

In addition to business tax preparation fees, businesses can deduct various other professional fees, including:

• Legal fees related to the business.
• Bookkeeping and accounting services.
• Consultation fees for financial planning or tax strategy.

Working with an experienced firm like The Wonzy Tax Company ensures you still claim all eligible deductions while complying with tax laws. This is particularly important for small business owners who may face additional complexities when preparing your tax return.

Factors Affecting Tax Preparation Fees

Several factors can influence how much you pay for tax preparation, including:

• Complexity of Tax Returns: More complex returns with multiple income streams or deductions will cost more.
• Experience of the Tax Preparer: Highly experienced CPAs or tax attorneys charge higher fees than entry-level preparers.
• Geographical Location: Fees may vary based on the cost of living in your area.
• Business vs. Individual Returns: Business tax returns generally cost more due to additional forms and schedules required.

How to Deduct Tax Preparation Fees

Here’s a step-by-step guide to deduct personal tax preparation fees and business-related costs:

1. Keep Detailed Records: Save invoices and receipts from your tax preparer or software provider.
2. Classify the Expense Properly: Ensure the fee is categorized as a business expense in your accounting records.
3. Include on Your Tax Return: Enter the expense on the appropriate form (e.g., Schedule C, Form 1120). For individuals, these fees may only be deductible under certain conditions as part of itemized deductions rather than relying on standard tax deductions.
4. Work with a Professional: Tax laws can be complex, so partnering with experts like The Wonzy Tax Company can ensure accuracy.

How Much Can You Deduct for Tax Preparation Fees?

The amount you can deduct depends on the total fees paid and their allocation between business and personal use. Only the portion related to business activities qualifies for a deduction as a business expense.

For instance, if 70% of the cost is for preparation fees as a business expense, only that portion is fees tax deductible. Working with an accountant or tax professional can help you accurately allocate costs and meet your tax preparation needs while staying compliant with tax laws.

Bottom Line

While preparation fees can’t be deducted for most individuals due to recent tax law changes, businesses and self-employed individuals can still claim fees as a deduction. This applies to both personal and business tax preparation when appropriately allocated.

Keeping accurate records and working with trusted professionals, like The Wonzy Tax Company, or an accountant for tax preparation, ensures you stay compliant and maximize your deductions. These professionals can also give tax advice, helping you navigate the complexities of tax planning.

Understanding the deductibility of tax preparation fees is a small but significant step in effective tax planning. Whether you’re an individual or a business owner, knowing the rules can help you make informed decisions and potentially save money during tax season.