Tax return preparer fees.

Sole proprietors received good news regarding the deductibility of their tax return preparation fees. The Internal Revenue Service recently ruled the portion of preparer fees reasonably allocable to the return's business portion may be claimed as part of the proprietorship deductions (revenue ruling 92-29, IRB no. 1992-16 of 4/20/92). However, the ruling goes on to say the other portion of the tax return preparation fee must be claimed as a miscellaneous itemized deduction subject to the 2% floor, which generally results in nondeductibility.

The ruling clarifies that the favorable above-the-line treatment applies to schedule C and F proprietors and to schedule E rental and royalty activities. Also, fees incurred in contesting tax deficiencies relating to these activities may be deducted in arriving at adjusted gross income.

Observation: This effectively reverses a private letter ruling issued last year that held virtually all tax return and consulting fees associated with a form 1040 must be treated as miscellaneous itemized deductions (PLR 9126014).

However, the new ruling would not allow deductibility of interest expense incurred by individuals on federal or state tax deficiencies associated with the business portions of their personal returns. Regulation 1.163-9T(b)(2) defines nondeductible personal interest to include any payments on federal, state or local income taxes, regardless of the source of income generating the tax liability.