1 in 3 Americans procrastinate when it comes to doing their taxes. The most common reason for procrastination is that filing taxes is too time-consuming and complicated.
But with tax day less than two months away, it’s best to begin your tax return preparation now. Tax laws and regulations change from year to year, so starting now will ensure you file your taxes correctly, and you get the most out of your return.
In this article, you’ll specifically learn more about if tax return preparation fees count as deductible taxes. Let’s dive in.
- 1 Who Can Deduct Tax Preparation Fees in 2022?
- 2 Which Fees Can You Deduct?
- 3 Claiming the Deduction
- 4 Can You Deduct Preparation Fees on State Tax Returns?
- 5 How Much Are Tax Preparation Fees Anyway?
- 6 Should You Hire a CPA or Use a Tax Software?
- 7 Start Your Tax Return Preparation Today
- 8 Learn More
Who Can Deduct Tax Preparation Fees in 2022?
In the past, taxpayers could deduct costs associated with preparing their tax returns. If they itemized their deductions, it was applicable under Schedule A. But, because of the 2017 Tax Cuts and Jobs Act (TCJA), this is no longer true for most people.
Those who are self-employed can still claim a tax deduction for the fees paid to prepare tax returns. However, the law is only valid from 2018 to 2025. Congress will need to renew the legislation to extend the date beyond 2025.
You can use this deduction if you own a business as a sole proprietor. You will claim it on Schedule C, which we will discuss momentarily.
Statutory employees can also use this deduction on Schedule C. A statutory employee is an independent contractor the company treats as an employee for tax purposes.
If you don’t know what kind of employee you are, contact a tax advisor to help you determine which category you fall into.
The IRS allows these people to deduct tax preparation fees because they are “ordinary and necessary” to running a business.
Which Fees Can You Deduct?
If you are eligible for a deduction on your tax return preparation fees, next, you need to know which expenses you can deduct. Deductible fees include:
- Fees from an account or tax preparer, including meetings and cost of preparation
- Cost of tax preparation software
- Fees from e-filing, including credit card fees
It’s important to note that you can only deduct the portion of the fee that represents preparing your Schedule C, E, or F. These are the business portion of your taxes.
Preparing the other parts of your tax return go in the category of miscellaneous personal expense, which isn’t tax-deductible.
Let’s look at an example. You have a CPA who prepares your taxes each year. Their fee is $800. However, only $300 represents the time it took to prepare your business taxes. Thus, you can only deduct $300 on your tax return.
If you’re wondering how you figure out how much of the total fee represents the time it took to prepare your business taxes, fear not. Simply ask your CPA for an itemized invoice.
An itemized invoice will show precisely what the CPA is charging you for. So, you can quickly see how much you paid them to prepare your business taxes versus personal taxes.
CPAs are used to writing itemized invoices, so this won’t be an issue.
Claiming the Deduction
There are three ways to deduct your tax preparation fees. They include Schedule C, E, and F. These Schedules fall under Form 1040, and they all relate to business taxes.
Schedule C is the most common way to claim a deduction for tax return preparation fees. It lists tax preparation fees as “legal and professional services.” On the Schedule C Form, you will see it on Line 17 in Part II under “Expenses.”
In this section, you can also include fees you may need to spend to resolve a tax dispute with the IRS over your profit or loss from your business.
Schedule E is more obscure. It covers various tax situations and entities under “Supplemental Income and Loss.” You can deduct the fees to prepare your tax returns for renting out real estate and collecting royalties.
But again, you cannot deduct the entire fee if you remember from the example above.
However, if you personally lived in or used a rental property during the tax year, you must calculate what percentage of your business costs is deductible.
This will require more work from your CPA or tax professional. But, it’s worth hiring someone to help you with the calculations, so you don’t receive a dispute from the IRS.
Schedule F is “Profit or Loss From Farming.” If you’re using the Schedule F Form, you will put your tax preparation costs under “other expenses” on Line 27. You must break down the expenses on these lines.
Instead of deducting $5,000, you need to itemize each fee. For example, you can write something like this:
- Tax preparation fees – $500
- Farming supplies – $3,500
- Labor – $1,000
As with the other forms, you can only deduct business tax expenses, not personal tax expenses.
Can You Deduct Preparation Fees on State Tax Returns?
The good news is, for business owners and statutory employees, the IRS says you can use the deduction to prepare your state tax returns too. As long as the tax fees are associated with your business, the deduction is applicable.
This is also true for local taxes.
Yet, because the taxation process is different by state, you’ll want to work with a local tax preparer to ensure the following:
- Which employment category you are eligible under
- How much you can deduct
- How to claim the deduction
You saw how the IRS offers different eligibility and forms to claim this deduction. The same will be true with your state.
How Much Are Tax Preparation Fees Anyway?
Unfortunately, there is no direct answer to this question. However, if you have a straightforward tax return, you may only need to pay a few hundred dollars to your tax preparer.
But those will more complicated taxes will find themselves paying $1,000 or more. In addition, investments, employment status, and residential status can also make your tax return preparation more expensive.
Robust small businesses with operations across state lines or between countries could pay significantly more too.
Additionally, working with a reputable tax accountant will be more expensive than working with someone with less experience.
If you’re worried about how much it may cost you, consider it as an investment in yourself or your business.
Even though doing your taxes yourself is free, you won’t have any help. This could lead to you losing money, even after spending a long time filling out your tax forms.
Tax professionals know the tax laws inside and out, even when they constantly change. Thus, they know all the deductions you can add and how to maximize your return.
Besides, if you spend time learning the laws and filling out the forms, you’ll probably end up feeling stressed and anxiety-ridden. So don’t let the cost of hiring a tax professional push you to choose the DIY option when it doesn’t serve you best.
Costs for Form 1040
When looking at the costs to prepare your Form 1040, you may pay between $200-$400 depending on if you have a state tax return.
However, if you add Schedule C, you will usually pay at least $450.
These fees only include your business taxes under Form 1040. You have to pay additional fees for personal and miscellaneous taxes.
Should You Hire a CPA or Use a Tax Software?
Using a CPA or tax accountant to prepare your taxes isn’t for everyone. Yet, you can use tax software if you have an easy return. There are plenty of affordable tax software services available to help you.
A tax accounting software will cost less than a CPA. Before choosing one, check out online reviews or talk with friends and family. This will help you get a better idea of which software will be best for you.
There are significant advantages to working with a CPA or tax professional for those with more complicated taxes. Some tax professionals specialize in a particular type of tax.
For instance, if you are a freelancer living abroad, you can hire a tax professional with particular experience in working with bonafide residents. Tax compliance can get tricky when you aren’t a W-2 employee. It will make your life much easier to work with a professional.
Plus, by doing so, you create a relationship. This leads to even less hassle when filing your taxes each year.
When you have complicated taxes, you can still use tax accounting software. But, the software isn’t foolproof. There is always a chance the software can make a mistake, and lose money for you.
Working with a tax professional is the soundest way to ensure your taxes are filed correctly, and you receive the best return, even if it costs more. At least some of the fees will be tax-deductible.
Start Your Tax Return Preparation Today
For most, taxes will continue to be complicated and a pain. If you haven’t already started your tax return preparation, you’ll want to do so right away. Procrastination will not make the process easier.
If you need more assistance with your tax return, search the Internet for “tax return preparer near me” or ask those you trust for a recommendation. You can also read through our tax advice in the Tax Section above.