Where should an individual taxpayer deduct tax preparation fees? The obvious
answer might be on Schedule A of Form 1040 as a miscellaneous deduction. Are tax
preparation fees deductible only on Schedule A for all taxpayers? Thankfully,
the answer is no.
Deducting tax preparation fees on Schedule A will provide little or no
benefit for most taxpayers because the total miscellaneous deductions must
exceed two percent of the taxpayer's adjusted gross income to provide any
benefit. In addition, the taxpayer's total itemized deductions must usually
exceed the standard deduction amount to provide any tax benefit.
The IRS ruled in Rev. Rul. 92-29 that taxpayers may deduct tax preparation
fees related to a business, a farm, or rental and royalty income on the
schedules where the taxpayer reports such income.
A taxpayer who is self-employed may deduct the portion of the tax preparation
fees related to the business, including schedules such as depreciation
schedules, on Schedule C of Form 1040 as a business expense. The tax preparation
fees deducted on Schedule C save the taxpayer income tax and self-employment
tax.
A taxpayer who is self-employed as a farmer would deduct the portion of the
tax preparation fees related to the farm on Schedule F of Form 1040. The tax
preparation fees deducted on Schedule F save the taxpayer income tax and
self-employment tax.
A taxpayer who has rental and/or royalty income reported on Schedule E of
Form 1040 would deduct the portion of the tax preparation fees related to the
rental and/or royalty income on Schedule E. The tax preparation fees deducted on
Schedule E save the taxpayer income tax. However, the tax preparation fees
deducted on Schedule E do not save the taxpayer any self-employment tax because
the rental and/or royalty income reported on Schedule E is not subject to
self-employment tax.
A taxpayer may not deduct all of the tax preparation fees on Schedules C, E,
and F of Form 1040. The tax preparer should provide a statement to the taxpayer
that indicates how much of the tax preparation fee was related to the taxpayer's
business, farm, and/or rental and/or royalty income. The taxpayer may deduct the
remainder of the tax preparation fee only on Schedule A.
If the tax preparer does not provide the taxpayer with a detailed statement
showing how much of the tax preparation fee was for the taxpayer's business,
farm, and/or rental and/or royalty income, the taxpayer shoud ask the tax
preparer for an itemized statement. If the tax preparer will not provide an
itemized statement, the taxpayer should use a reasonable allocation. In that
case, the taxpayer should seriously consider using a different tax preparer next
year.
Here is an example. Assume that the taxpayer is self-employed and also owns
rental real estate. The tax preparation fee for the taxpayer's Form 1040 and
related schedules for 2005 was $600. The tax preparer states that of the $600
total fee, $300 was related to the taxpayer's business, $200 was related to the
rental real estate, and the remainng $100 was related to other parts of the
taxpayer's income tax return. The taxpayer paid the $600 in February 2006.
On the taxpayer's income tax return for 2006, the taxpayer may deduct the
$600 tax preparation fee as follows: $300 on Schedule C, $200 on Schedule E, and
$100 on Schedule A as a miscellaneous deduction.
