As the months fly by and we find ourselves rapidly approaching another tax season, you’re probably in the midst of gathering receipts and records, looking for ways to minimize your tax burden, and debating how to best get your taxes done: Do your own taxes using tax preparation software, or opt for the more stress-free route and work with a CPA firm in Raleigh.
In some cases, you might just be able to deduct tax preparation fees and costs on your taxes—but not everyone is eligible for this deduction. To clear some of that up, our CPAs are sharing a more in-depth guide to tax preparation fees. We’ll answer the question, “Are tax preparation fees deductible?”, along with the most common tax preparation fees, how changes in the tax code may affect you, and how to budget wisely.
Are Tax Preparation Fees Deductible?: A Look Back at the Tax Code Changes
So, are tax preparation fees deductible? The answer, like almost every other tax question, isn’t so simple.
Today, if you are a W-2 employee, you can not deduct any costs or charges for preparing your tax return if you file a standard deduction (which is the kind filed by the majority of people).
If you’re thinking something’s changed, you’re correct; up until 2017, anyone could deduct the previous year’s tax preparation costs from their taxes. For example, you could deduct the cost of preparing 2015’s taxes from the return you filed in 2016. However, this changed in 2017. So, when are tax preparation fees deductible?
In 2017, the Tax Cuts and Jobs Act (TCJA) was passed and signed into law, which led to an overhaul of the United States tax code. While it did increase the standard deduction by a significant amount, it eliminated many of the individual, line-item deductions, including the deduction for personal tax preparation. However, business owners can usually still claim a tax deduction as a business expense.
Deducting Tax Preparation Fees as a Business Expense
While tax preparation fees can’t be deducted when it comes to personal taxes, they are considered an “ordinary and necessary” expense for business owners. This means that if you are self-employed, you can deduct your tax preparation fees under your business expenses, at least through the year 2025 if Congress does not renew the TCJA. Specifically, eligible parties include:
- Sole proprietorships who fill out and file Schedule C for Form 1040 or 1040-R which allows you to report income or losses from businesses you operated as a sole proprietor;
- Business owners whose businesses are classified as partnerships, limited liability corporations, or S corporations;
- Farmers who file Schedule F which reports income earned from agricultural activities;
- Individuals receiving income from rental properties, royalties, or other income reported when filing Schedule E
Independent contractors and statutory employees (independent contractors who are classified as employees for tax withholding purposes) may also deduct tax preparation fees. This includes:
- Food and beverage delivery drivers who are paid on commission (such as working for DoorDash or InstaCart);
- Full-time traveling or local salespeople who get paid solely on commission;
- Life insurance agents;
- Freelance workers, such as graphic designers.
If you aren’t sure if these apply to you, it’s important to consult with an experienced tax professional to help you avoid fines and fees.
How Much Can You Deduct for Tax Preparation Fees
Now that we’ve addressed the popular question, “Are tax preparation fees deductible,?” Let’s discuss exactly how much you can deduct. The exact amount that you can deduct will be unique to you, but if you are a business owner or independent contractor and are eligible to do so, here are some expenses you may be able to deduct:
- Tax preparation software you use yourself,
- Fees for e-filing;
- The cost of working with an accountant or tax professional, including the cost of the return preparation as well as any consultations;
- Legal fees and audit representation.
It’s important to note you can only deduct the portion of the fee related to preparing the business side of your taxes, such as Schedule C, E, or F. Anything besides this is considered personal, and thus, ineligible. Working with a local CPA is recommended if you’re not sure how to itemize the costs.
Factors Affecting Tax Preparation Fees
Even if you are sure you can deduct your tax preparation fees, you might be wondering exactly how much those fees might add up to. That depends on quite a few factors:
Complexity of Your Tax Situation
The more complex your tax situation, the higher the fee is likely to be. For instance, if you have multiple income sources, self-employment income to factor in, or investments, you may be looking at a bit of a higher cost to prepare your return.
Type of Tax Professional
Different tax professionals charge different rates. Common tax professionals include:
- CPAs (Certified Public Accountants). CPAs have received such a title (vs accountant) because they have met state licensing requirements through education, training, and have passed the CPA exam. Since CPAs bring a robust background to the table and can offer services beyond that of an accountant, their fees may be slightly higher.
- Enrolled Agents: Federally authorized tax practitioners who may charge moderate fees.
- Tax Attorneys: Tax attorneys tend to have higher fees, especially for complex legal tax matters.
Tax Preparation Software
Accounting software can be cost-effective, but there may be fees for advanced features or assistance. They also tend to get confusing and time-consuming if the tax situation is more complex, leading to sometimes costly headaches.
Variations in tax regulations, local tax codes, and the overall cost of living in different regions make a big difference in the overall cost. In areas with complex and frequently changing tax laws, tax professionals may need to invest more time and resources to stay updated and navigate the intricacies of the tax code, potentially leading to higher service fees.
Plus, the general cost of living in a particular location can impact the overall operating expenses of tax preparation firms, influencing the prices they charge for their services. Big cities and urban centers with higher living costs may experience higher service fees compared to more rural areas.
Type of Forms and Schedules Required
The more forms and schedules needed to complete your return, the higher the fee. For example, if you have a Schedule C for business income or multiple investment transactions, it may increase the complexity of the tax preparation service and thus result in a higher fee.
If you require additional services such as tax planning, audit support, or advice on financial matters, these may incur extra charges.
A Look at Common Fee Structures when Tax Preparation Fees are Deductible
Fees vary widely in the world of tax preparation, but you can usually expect to come across one of these four fee structures:
Some tax professionals charge by the hour. Rates can vary widely, so it’s essential to have a clear understanding of how long your tax preparation is likely to take.
Many tax professionals charge a flat fee based on the complexity of your tax situation. This is often the preferred method for straightforward individual tax returns.
Per-Form or Per-Schedule Fees
Some tax professionals charge based on the number of forms or schedules required to complete your return. This is common when dealing with more complex tax situations.
Percentage of Refund
Some tax preparers may charge a percentage of your tax refund as their fee. Be cautious with this method, as it may incentivize them to prioritize a larger refund over accurate filing.
Tax Preparation Fees 2023
At Steward, Ingram & Cooper PLLC, a Raleigh-Durham CPA firm, we assist individuals with complex tax needs as well as small business owners who prefer to outsource their accounting. We charge an hourly rate of $300 for tax consulting services.
For individuals with complex tax needs, such as those with foreign investments, multi-state taxes, capital gains tax, and more, our tax preparation costs begin at $1,000. For business owners, we will prepare your 2023 taxes beginning at just $1,500. In either situation, personal or business, we reserve the right to charge additional fees based on your unique tax situation which may make your tax preparation needs more complex.
Final Word: Are Tax Preparation Fees Deductible?
We understand that both personal and business tax preparation needs can be complicated. In fact, seemingly simple deductions can become complex. That can leave even the most seasoned taxpayer wondering “Are tax preparation fees deductible?” Fortunately, with over 20 years of accounting experience, Steward Ingram & Cooper PLLC has the experience necessary to answer that question and minimize your stress, all while reducing your tax burden. Our tax consulting fees start at $300 per hour and are priced to fit your unique needs. Individual tax returns begin at a base fee of $1,000, while business tax returns start at $1,500.
To learn more or to schedule a consultation, reach out to us today at (919) 872-0866 or fill out the form below to get started. We have offices in Raleigh and Durham, but serve all surrounding communities, such as Morrisville and beyond.
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