Do you run a business and you want to know if bookkeeping and tax preparation fees are tax deductible? If YES, here is everything you need to know. A lot of businesses dread the tax season because of all the complex and confusing figures they would have to deal with.
This is why bookkeeping and tax preparation services are in business. These businesses can easily take over your tax concerns and deliver to you a finished work according to allotted time frame. Accountants and bookkeeping services have experience in filing out even the most complex documents. They can help you ensure you’re minimizing your bill and maximizing your return.
Bookkeeping services is the recording, on a day-to-day basis, of the financial transactions and information pertaining to a business. It ensures that records of the individual financial transactions are correct, up-to-date and comprehensive. After the service have been rendered, a fee is usually paid and this is known as tax preparation fee.
This then means that tax preparation fees are paid to professional accountants who help fill out your forms and file your yearly taxes. An accountant has unique insight and experience filing these types of documents. As such, they can help you reduce your tax bill and maximize your refund.
There are many benefits to hiring a CPA to help with your tax preparation. The associated fees, however, are still something that you should account for in your finances. If eligible, you should treat these expenses as a deduction. They can be helpful, especially if you’re filing business/self-employed tax.
Who Can Deduct Tax Preparation Fees?
When filing your taxes, you need to know the deductions for which you’re eligible to minimize your bill. But you should know that not everybody is eligible to deduct this fee for certain reasons. Some workers cannot deduct these fees when you view it under the federal law.
For example, W2 employees cannot deduct tax-prep fees under the tax reform bill. However, self-employed filers and business owners can apply for this deduction—under certain circumstances.
How to Deduct Tax Preparation Fees
If you own a business, you may be eligible to deduct tax preparation fees. In general, the IRS allows eligible taxpayers to deduct expenses associated with:
- The fee from the accountant/preparer
- Cost of tax-prep software programs
- Fees for e-filing (including credit card fees), etc.
Note that only those who itemize their deductions are eligible to deduct tax preparation fees. You should include this deduction on your Schedule A. Typically, you can include these fees under your ‘miscellaneous expenses deduction.’ However, there is a catch: the 2% AGI Limit.
The AGI limit means that any miscellaneous expenses you can deduct must be more than 2% of your Adjusted Gross Income. For example, if your AGI is $60,000, the 2% threshold would be $1,200. If your miscellaneous expenses total $500 (including $300 for tax prep), you would not meet the 2% threshold. This means you would not be able to take any deduction because your miscellaneous expenses were too low.
If instead, you spent the same $300 for tax prep plus $1000 for an unreimbursed business expense, then your total miscellaneous expenses would be $1,300. In this case, you would be able to deduct $100 (the amount that exceeds the threshold). So long as your miscellaneous expenses exceed 2% of your AGI, you can claim a deduction for the difference.
According to Investopedia, miscellaneous Schedule A itemized deductions subject to a 2% of AGI threshold have been taken away for tax years 2018 through 2025. This includes deductions that can be found in the tax preparation category;
These include the cost of tax preparation software, hiring a tax professional, or buying tax publications. Also gone are deductions for electronic filing fees and fees you pay to fight the IRS, including attorney fees, accounting fees, or fees you pay to contest a ruling or claim a refund.
If you hire someone to prepare both your personal and business taxes, ask for a separate bill for each. Fees you pay to prepare your business return are fully deductible as a business expense. Also note that tax preparation fees on the return for the year in which you pay them are a miscellaneous itemized deduction and can no longer be deducted. These fees include the cost of tax preparation software programs and tax publications.
They also include any fee you paid for electronic filing of your return. But keep in mind that legal and professional fees that are necessary and directly related to running your business are still deductible. These include fees charged by lawyers, accountants, bookkeepers, tax preparers, and online bookkeeping services
5 Accounting Services That Are Tax Deductible
Accounting expenses, auditing expenses, and bookkeeping expenses are all deductible business expenses. Here is a more detailed list of accounting-related expenses you can deduct:
- Bookkeeping Expenses: You can deduct all expenses for bookkeeping, including those for a bookkeeper, or for bookkeeping and accounting software to help you or an employee do your bookkeeping.
- Accountant/CPA/Financial Adviser: The services of an accountant, CPA, or financial adviser for review of financial statements or business (but not personal) financial planning.
- Auditing: If you are a public corporation, you can deduct fees for an auditing firm.
- Barter: Accounting for barter transactions, including costs for a barter exchange is deductible.
- Cash Transactions: You can deduct the cost of accounting for cash transactions.