Q: Are legal fees tax deductible for defense against civil & possible criminal charges stemming from sale of a business?
Last year I "sold" my company (company A) to another company (company B). Company B was to pay me over three years.
I stayed on as a full-time paid contractor to work for company B. I retained ownership company A (was planning to relinquish ownership after 50% of the full payout was reached - which never happened).
After 1 year. company B got in legal trouble and was shut down, along with company A. Since I was still named as the owner of company A I was sued civilly and also faced criminal charges (still pending).
I had to hire a civil lawyer and a criminal lawyer. I withdrew money from my 401k to pay these legal fees. I paid a 10% IRS penalty for withdrawal (I'm 54 years old).
My question is do I get to write-off the legal expenses as they were in defense of a business related issue? My lawyer says maybe NOT because I hired him personally, not the business.
A: The issue is very complex and depends heavily on the specifics. Just pay for a consultation with an experienced tax attorney or other tax specialist so that you can get actual legal advice. Make sure you look carefully - many times you'll find business attorneys who also do tax instead of attorneys who practice tax law full time. A civil or criminal attorney may not have the specialized experience with tax to provide accurate advice.
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