Deductible Law Firm Expenses | Kathryn Meyer Law PC

A law firm can deduct the ordinary and necessary costs of running the practice under section 162 of the Internal Revenue Code: rent, staff pay, malpractice insurance, software, licenses, advertising and similar costs. Entertainment and club dues are not deductible, most business meals are limited to 50 percent, and travel, gifts and vehicles need specific records. Personal spending run through the firm is what turns a routine audit into a serious one.

The line between a firm expense and a personal one is where many audits of small firms start. This page sets out the rules as they stand for 2026, including a change to employer-provided meals that took effect this year. It is part of Kathryn Meyer's guidance on tax planning for law firms.

How to test a firm expense, step by step

Is it ordinary and necessary? Publication 334 (2025) defines an ordinary expense as one that is common and accepted in your field, and a necessary expense as one that is helpful and appropriate for your business. It does not have to be indispensable.
Is it partly personal? If so, separate the personal part, which is generally not deductible.
Is it on a "no" list? Section 274(a) bars entertainment, entertainment facilities and club dues, and Publication 334 lists other costs you usually cannot deduct, such as fines paid to a government for breaking the law and political contributions.
Does a percentage or dollar limit apply? Meals are generally 50 percent under section 274(n); business gifts are capped at $25 per recipient per year under section 274(b).
Must it be capitalized? Equipment and improvements are recovered through depreciation or expensing rather than deducted as ordinary expenses.
Can you prove it? Section 274(d) requires adequate records or corroborating evidence of amount, time and place, business purpose and business relationship for travel, gifts and listed property such as vehicles.

Common law firm costs and how they are treated

Cost	General treatment	Source
Office rent, staff wages, supplies, utilities, bank fees, advertising	Deductible if ordinary and necessary	IRC 162(a); Publication 334
Malpractice insurance	Deductible as a business insurance expense	Publication 334
Licenses and regulatory fees; education expenses	Listed among other expenses you can deduct	Publication 334
Meals with clients or referral sources	50 percent, only if not lavish and you or an employee are present	IRC 274(k), 274(n)
Tickets, golf, concerts and other entertainment	Not deductible	IRC 274(a); Publication 463
Country, athletic, airline, hotel and lunch club dues	Not deductible	IRC 274(a)(3); Publication 463
Business gifts	Up to $25 per recipient per year	IRC 274(b)
Holiday party or picnic for staff	Fully deductible; exception to the entertainment rule and the 50 percent limit	IRC 274(e)(4); Publication 463
Employer eating facility, and meals for the employer's convenience	Not deductible for amounts paid or incurred after December 31, 2025	IRC 274(o)
Travel away from home	Deductible with records; meals at 50 percent; a spouse's costs only if an employee traveling for a bona fide business purpose	IRC 162(a)(2), 274(d), 274(m)(3)
Fines paid to a government for breaking the law; political contributions; lobbying	Not deductible	Publication 334

Meals and entertainment: the rules that trip up firms

Publication 463 (2025) states the basic position plainly: you can no longer deduct any expense for activities generally considered entertainment, amusement or recreation, but you can still deduct 50 percent of business meals if you or an employee are present and the meal is not lavish or extravagant. The meal can be with a current or potential client, a consultant or a similar business contact.

Food at an entertainment event is treated as a meal only if it is bought separately or stated separately on the bill. Publication 463 gives the example of a baseball game: the tickets are not deductible, but hot dogs and drinks bought separately are a 50 percent meal. If a suite ticket includes food with no separate price, all of it is entertainment. The publication also warns that the rule cannot be avoided by inflating the food charge.

New for 2026: section 274(o), enacted in 2017 with a delayed start, denies any deduction for amounts paid or incurred after December 31, 2025 for operating an employer eating facility described in section 132(e)(2) and the food and beverages associated with it, and for meals furnished for the employer's convenience under section 119(a). A firm that has been deducting a staffed cafeteria or similar on-site meal program should revisit that treatment for 2026.

What draws IRS attention

Some patterns invite closer review because the IRS treats them as signs that something more than a bookkeeping error may be going on. The Internal Revenue Manual lists "claiming substantial business expense deductions for personal expenditures" among its indicators of fraud, along with failing to keep adequate records and back-dated documents. The way a civil examination can change course is described in the warning signs that a civil IRS audit could turn criminal. Common trouble spots in law firms include:

Household costs in the firm's books. Personal bills paid from the operating account and coded as office expenses.
Vehicles claimed at or near 100 percent business use with no log of dates, destinations and purpose.
Estimated amounts. Publication 463 says you cannot deduct amounts you approximate or estimate.
Entertainment coded as meals. A sports ticket or club charge recorded as a client lunch.
Family travel. A spouse's airfare deducted when the spouse is not a firm employee on a bona fide business trip.

What changes the answer

Your entity and who paid. An owner who is an employee of an S corporation and pays firm costs personally usually needs reimbursement under an accountable plan to keep the deduction; a sole proprietor deducts directly on Schedule C (Publication 463).
Client case costs. Whether costs advanced on a client's matter are deductible when paid depends on the fee agreement; that question is covered in Don't Neuberger Your IOLTA Account.
Reimbursement by a client. Publication 463 says a self-employed attorney who adequately accounts for meal expenses to a client who reimburses them is not subject to the 50 percent limit; the client is, if it can deduct the cost.
Equipment purchases. According to the IRS summary of the 2025 law, Pub. L. 119-21 provides a permanent 100 percent additional first-year depreciation deduction for qualified property acquired after January 19, 2025, and raised the section 179 expensing limit to $2,500,000 for tax years beginning after 2024, indexed after 2025.
The vehicle method. The 2026 standard mileage rate is 72.5 cents a mile for January to June and 76 cents for July to December (IRS standard mileage rates page). Records are still required either way.
Who the party is for. The section 274(e)(4) exception covers recreational and social activities primarily for employees other than highly compensated employees; a party mainly for clients is entertainment.

For example: one firm's client development spending

For example, imagine a two-lawyer firm reviewing its 2026 client development costs. It paid $6,000 in country club dues, $300 for two baseball tickets for a referral source plus $80 of food bought separately at the park, $1,440 for twelve lunches with clients at which a lawyer was present, $3,000 for a holiday party for all staff, and $600 for gift baskets of packaged food sent to ten referral sources at $60 each. The club dues and tickets produce no deduction. The ballpark food is a $40 deduction and the lunches a $720 deduction at 50 percent. The staff party is deductible in full at $3,000. Publication 463 treats packaged food meant for later use as a gift, so each basket is capped at $25, a $250 deduction. Of $11,420 spent, $4,010 is deductible, and only if the firm can show who attended, when and why. This is a hypothetical, not a real case.

Common mistakes with law firm deductions

One line for "meals and entertainment." The two have different rules, so they need separate accounts.
Relying on a card statement. It shows amount and payee, not the business purpose or who was present.
Deducting bar association dinners, tickets and golf the same way. A separately priced meal can be 50 percent deductible; the entertainment cannot.
Forgetting the 2026 meal change. On-site meal programs that were deductible before may not be now.
Paying contractors and experts without the paperwork. Deductible fees can still carry reporting duties; see when payments to and by law firms are reported on Form 1099.
Using the firm account for personal bills. Even if later reclassified, it blurs the records an examiner relies on.

What to do this week

Split meals, entertainment, gifts and staff events into separate accounts in your books.
Pull this year's club dues, tickets and similar charges and mark them nondeductible.
Check whether the firm provides meals on site, and how they are coded for 2026.
Start or update a mileage log for every vehicle claimed for business.
Move any personal spending out of the operating account and document any repayment to the firm.
Keep receipts, and note who attended each meal and why; the standards are in what records the IRS requires to support business deductions.

Frequently asked questions

Are bar dues and CLE deductible?

Publication 334 lists licenses and regulatory fees and education expenses among the other expenses a business can deduct, so required license fees and work-related continuing education generally qualify. Dues to clubs organized for business, pleasure, recreation or other social purposes do not, and Publication 463 says it is a club's purposes and activities, not its name, that decide.

Can I deduct a home office?

Possibly. Publication 334 says the space must be used regularly and exclusively for business, and must be your principal place of business, a place where you meet clients in the normal course of business, or a separate structure. Its own example is an attorney who writes briefs in a den the family also uses for recreation: no deduction. A simplified method of $5 per square foot of qualifying space is available, and Publication 587 has the details.

Is a client dinner after a court hearing deductible?

Generally 50 percent of it, if a lawyer or employee of the firm is present and the meal is not lavish or extravagant under the circumstances. Keep the receipt and note the client and the business discussed.

What happens if the IRS disallows a deduction?

The tax is recomputed, interest runs, and a 20 percent accuracy-related penalty often follows unless reasonable cause applies. See what penalties the IRS can add after an audit.

How long should the firm keep expense records?

Generally at least three years after filing the return that claims the deduction, and longer in some cases. The periods are explained in how far back the IRS can audit.

Do firm deductions affect the qualified business income deduction?

Yes. Deductions reduce the practice's qualified business income, which is the base for that deduction; how the deduction works for lawyers is explained in whether a lawyer can take the 20% qualified business income deduction.

Keeping deductions defensible

Clean books make deductions easy to defend; mixed ones make them hard to keep. Kathryn Meyer spent more than two decades in the IRS Office of Chief Counsel and can review your firm's expense coding before an examiner does. A review of expense bookkeeping for audit readiness is part of the second quarter of the Quarterly Tax Health Checkup. Contact the firm or call (571) 560-8674.

Sources

Back Home