What are professional fees in accounting?

What are professional fees?

Professional fees are the costs of hiring outside professionals, such as accountants, attorneys, consultants, or auditors, to perform work that requires specialized knowledge. These fees ensure the business remains compliant, financially organized, and strategically guided. They’re recurring in nature and part of a company’s standard operating costs.

How to categorize professional fees

• Record as Operating Expenses in your income statement.
• Use a “Professional Fees” or “Legal and Professional Services” account in your chart of accounts.
• Separate recurring services (e.g., accounting or tax prep) from one-time projects (e.g., audits, consulting).
• Capitalize only fees directly tied to acquiring or improving a capital asset (e.g., real estate closings or business purchases).
• Maintain clear records and invoices for each professional service to support deductions and audit readiness.

Examples of professional fees

• Accounting and bookkeeping services, including financial statements and audits.
• Tax preparation and filing assistance.
• Legal advice or contract drafting.
• Business consulting, strategy, or financial planning.
• Valuation or due diligence services.
• Regulatory or compliance consulting.
• Professional membership dues related to accounting or finance work.

Tax implications for professional fees

• Professional fees that are ordinary and necessary for business operations are 100% tax-deductible.
• Fees related to personal matters or non-business activities are not deductible.
• Payments for services connected to acquiring assets or long-term investments must be capitalized, not expensed.
• Retainers or advance payments should be deducted in the year services are performed, not when paid.
• Always keep detailed invoices showing the nature and purpose of the professional service.