LLC Formation Costs and Professional Fees: What You Can Actually Deduct #
The first $5,000 of LLC startup costs are generally deductible in the year you form the entity. That includes your formation expenses, initial legal fees, state filing costs, and other direct costs of getting the LLC established. This isn’t some obscure loophole. It’s a standard business deduction the IRS expects you to take if you’re legitimately starting a business.
Here’s where it gets less simple. If your startup costs exceed $5,000, you don’t get to deduct everything immediately. The amount over $5,000 gets amortized over 180 months. That’s 15 years. So if you spend $8,000 forming your LLC, you deduct $5,000 in year one, then you spread the remaining $3,000 over the next 15 years at $200 per year. Not ideal, but that’s how the tax code handles it.
What counts as startup costs? Legal fees for forming the entity. State filing fees. Initial compliance costs. Accounting fees for setting up your books. These are one-time costs you incur before your LLC is actually operating. Once the LLC is up and running, different rules apply.
Professional fees after formation are ongoing business expenses. You pay a CPA to handle your annual tax returns, that’s deductible. Legal fees for contract review, compliance work, or general business advice, deductible. Tax software subscriptions, bookkeeping services, compliance monitoring. All deductible as ordinary business expenses in the year you pay them.
The distinction matters because startup costs get different treatment than ongoing operating expenses. Startup costs are what you spend getting the business ready to operate. Operating expenses are what you spend keeping it running. Both are deductible, just under different rules.
Your annual CPA fees for tax preparation and planning are straightforward deductions. You need tax returns prepared. You need advice on tax strategy. That’s a cost of running the business. Same with bookkeeping. If you hire someone to maintain your LLC’s financial records, categorize transactions, reconcile accounts, that’s an operating expense.
Legal fees get more complicated depending on what you’re paying for. General business legal advice is deductible. Contract review for partnerships or service agreements, deductible. Legal fees related to defending the business in disputes, deductible. Legal fees for personal matters that happen to involve your business, not deductible. The IRS looks at the nature of the legal work, not just whether you paid from the business account.
Tax software falls squarely in the deductible category. You’re using it to track transactions, calculate tax liability, and generate reports for your LLC’s operations. Whether it’s specialized crypto tax software or general business accounting platforms, it’s a necessary business expense.
Compliance services matter more as your operations grow. You might pay for regulatory monitoring, filing services, or professional help maintaining good standing in your state. These are all legitimate business costs. Document what you’re paying for and why it’s necessary for your LLC’s operations.
The documentation requirement applies to professional fees just like any other deduction. Keep invoices showing what services you received, when you paid, and what the business purpose was. Your CPA sends you a bill for annual tax prep, save it. Your lawyer charges you for contract review, keep the invoice showing what they worked on.
People sometimes blur the line between business and personal professional fees. You pay a lawyer to handle your divorce but try to deduct it because you discussed the business implications during meetings. That doesn’t work. The fees need to be for actual business services, not personal legal matters that tangentially touch your business.
Setting up the LLC correctly from the start saves money on professional fees later. If you cut corners during formation, you pay more fixing problems down the road. Spending money upfront on proper legal and accounting setup is cheaper than paying to unwind mistakes later.
Custody solutions like D’Cent for securing your LLC’s digital assets are business expenses too. You’re protecting business property. The fees or costs associated with proper custody are part of your operating expenses, just like paying for insurance or security systems would be in a traditional business.
The registered investment advisor handling your portfolio probably won’t help you track LLC formation costs and professional fee deductions. That’s accounting and tax territory. Digital Wealth Partners provides investment advisory and custody services, but coordinating the entity structure, tracking deductible expenses, and managing the tax strategy requires family office level oversight.
Digital Ascension Group works with clients whose digital asset operations involve complex entity structures, multiple professional service providers, and tax strategies that need coordination across everything. When you’re paying thousands in annual professional fees and need someone making sure it’s all documented and deducted properly, that’s family office work.
The key takeaway: take the $5,000 startup deduction, amortize anything over that, and deduct your ongoing professional fees as business expenses. Keep good records. Don’t try to deduct personal professional fees by calling them business expenses. Work with professionals who understand both the tax rules and how to document everything correctly.
Contact Digital Ascension Group to learn how our family office services can coordinate your complete financial picture, including entity structuring and professional fee optimization.
