Tax and SARS knowledge base

Can a sole proprietor deduct legal costs for the business?

Last reviewed: 28 August 2026

Direct answer

A sole proprietor cannot deduct legal costs simply because the invoice was paid from a business account. The cost needs a close connection to the trade and must be considered for its purpose and character. Legal work connected with day-to-day income production may be treated differently from work that acquires, creates, protects or disposes of an enduring asset or right.

SARS lists legal costs as an expense category in the business section of the ITR12. That is a reporting label, not automatic permission to claim every legal invoice. Because a sole proprietorship is not separate from its owner, start by separating the taxpayer's trade matter from private, investment, family and ownership matters.

What this means in practice

First ask what the lawyer was engaged to do. A demand to recover an unpaid trading invoice, advice on a routine customer contract, or correspondence about an operating dispute may be closely connected to earning business income. The facts still matter. Keep the engagement letter, the invoice, the advice or correspondence, and a short note explaining the commercial purpose.

Next ask whether the work relates to the business structure or to a lasting advantage. Costs associated with buying or selling a business, acquiring premises, establishing a major right, changing ownership arrangements, a lease premium, or a capital asset need careful treatment. Do not put those costs into the legal-costs line merely because the business benefited. The correct treatment can depend on the exact document and transaction.

Personal and mixed costs need special care. A divorce, estate, family, personal debt, residence, shareholder dispute or private investment matter does not become a trade expense because the owner also operates a business. If one invoice covers both a business and private matter, obtain a meaningful split from the lawyer. Do not invent a percentage after the fact.

The timing also matters. Record the expense in the year supported by the invoice and underlying facts, then reconcile it to the business records. If an amount was recovered from the other party, reimbursed by insurance, or charged on to a customer, retain the settlement or recovery evidence. A cost that later changes should not remain in the return as though nothing happened.

Step-by-step

Make a legal-matters schedule.

List the lawyer, matter reference, invoice date, amount, VAT treatment in the accounts where relevant, and the trade purpose.

Read the engagement documents.

Identify whether the work was about ordinary trading operations or an asset, ownership, financing or personal matter.

Match the invoice to evidence.

Keep the engagement letter, invoice, court or settlement document, correspondence and proof of payment. A bank statement alone does not explain the purpose.

Identify mixed or recovered amounts.

Ask for an itemised invoice where a matter contains business and private work. Record any reimbursement, recovery or credit separately.

Review the return entry.

Use the current ITR12 business section only after the accounting records and supporting file agree. Do not rely on an old ITR12 screen or a generic expense category.

Keep the final file.

SARS says supporting documents for a return should be retained for at least five years. Save the submitted return, assessment and all supporting documents together.

Documents and records to keep

Engagement letter, mandate and fee agreement.
Itemised invoices, proof of payment and VAT documentation used in the accounts.
Contracts, correspondence, pleadings, settlement agreements and outcome documents.
A short contemporaneous note showing the connection to the trade.
Evidence of reimbursements, recoveries, insurance proceeds or customer recharges.

Important limits and exceptions

There is no safe rule that all legal fees connected to a business are deductible. The legal label is less important than the substance of the matter. A cost may be partly private, capital in nature, not sufficiently connected to the income-producing activities, or subject to a different tax treatment. Do not claim a provision for an expected legal bill as though it were a paid and established trade expense without checking the applicable tax rules.

This guide does not determine the tax treatment of a particular dispute, acquisition or settlement. It also does not calculate VAT, capital gains tax or a deduction. If the legal work concerns a purchase or sale, intellectual property, a restraint, a lease, a settlement, a tax controversy or an owner dispute, obtain advice before filing.

When to get tailored advice

Get professional advice where the invoice is large, relates to a business acquisition or disposal, contains mixed purposes, was reimbursed, or has resulted in a settlement payment. TaxProof can prepare a clear evidence schedule for review, but the final tax position should follow the documents and the specific facts.