It's Tough to Deduct Divorce Costs as a Small-Business Expense

QUESTION: I own my own business. Recently, I divorced my wife. During the proceedings, there was a heated argument over whether or not my ex-wife was to receive a portion of it. In the end, the business was considered mine completely and she received nothing from the business.

Can I claim the legal fees on my tax returns, due to the fact that my business became part of the divorce?

ANSWER: Well, we checked. "Unfortunately, it doesn't sound like it," says Joseph R. Kluemper, senior tax manager at BDO Seidman in New York. "The general rule is that attorney fees related to divorce are nondeductible." Basically, the Internal Revenue Service sees your divorce as a personal matter, even though the end of your marriage had significant business implications.

There's one loophole that might work for you. Did any part of the legal discussions have to do with tax advice? Perhaps your lawyer outlined the potential tax consequences of splitting the business with your ex-wife. If that's the case, you can always deduct fees related to tax-planning advice as a miscellaneous deduction, as long as the fees exceed 2% of your adjusted gross income. The best way to handle this is to request a detailed billing statement from your attorney, which would separately itemize any deductible services that involved tax advice, says Leon Finkel, partner at Chicago divorce firm Berger Schatz.

Incidentally, in case you thought of this, you couldn't have paid the attorney's fees through the business and then written that off as a business expense. You're entitled to deduct a number of small-business costs — things like office supplies, insurance premiums and retirement contributions — because they are "normal and ordinary" (the IRS's litmus test) in your line or work. A divorce (we hope) doesn't meet that definition.

One last thing: Be thankful your business has survived the divorce. Many businesses — especially those in which both spouses are heavily involved in day-to-day operations — aren't so lucky. In some rare cases, divorced entrepreneurs remain together for the sake of the business. It sounds like you've kept your business while closing a chapter on your past — so you've likely come out ahead, even if it's not tax-deductible.

Today's Q & A from Smart Money.