Lawsuit Settlement Taxes

[araia2456]

New York

Long story short in 2019 I signed a contract to merge my sports agency with another agency in exchange for a salary and was made an independent contractor. Unfortunately never saw a dime. My lawsuit against them may be close to settling and in trying to come up with the lowest number I would settle for I was trying to figure out the tax side of things.

Prior to this I was operating as a sole prop and writing off my business expenses on my personal taxes. I know typically legal fees aren't tax deductible but I was curious if they were since it involved my business and income, or if there was a way I wouldn't get stuck paying taxes on the part of my settlement that goes to the lawyer for the contingency.

Thanks for the help!

 

[Taxing Matters]

New York

Long story short in 2019 I signed a contract to merge my sports agency with another agency in exchange for a salary and was made an independent contractor. Unfortunately never saw a dime. My lawsuit against them may be close to settling and in trying to come up with the lowest number I would settle for I was trying to figure out the tax side of things.

Prior to this I was operating as a sole prop and writing off my business expenses on my personal taxes. I know typically legal fees aren't tax deductible but I was curious if they were since it involved my business and income, or if there was a way I wouldn't get stuck paying taxes on the part of my settlement that goes to the lawyer for the contingency.

Thanks for the help!

The entire amount of the award is taxable income to you. However, since the lawsuit was directly related to your business, the costs of the lawsuit, including legal fees, are deductible as a business expense.

 

[araia2456]

The entire amount of the award is taxable income to you. However, since the lawsuit was directly related to your business, the costs of the lawsuit, including legal fees, are deductible as a business expense.

If they got stuck paying half of my lawyer fees to my attorney directly, is that portion also taxable income to me?

 

[Taxing Matters]

If they got stuck paying half of my lawyer fees to my attorney directly, is that portion also taxable income to me?

Yes. That's no different than the contingent fee your lawyer receives. In both cases, the economic substance is that the settlement/judgment is money owed to you and then paid to by you to your attorney per your fee agreement even though in form the check may go directly to your lawyer and bypass you.

 

[araia2456]

Thanks, really appreciate the help

 

[Taxing Matters]

Thanks, really appreciate the help

You're welcome, glad you found the information helpful.