Are Business Valuation Expenses in Divorce Tax Deductible? The 2026 Rules

Key Takeaways

• TCJA Section 11045 suspended miscellaneous itemized deductions through 2025, and subsequent legislation extended the suspension; the practical result is that personal divorce-related expenses are not deductible on federal returns for the foreseeable future
• IRC Section 212(1) allows deductions for ordinary and necessary expenses paid for the production or collection of income, but the deduction now applies only to expenses connected to a trade or business or to rental and royalty income under Section 62(a)(4), not to personal income-production expenses
• Fees paid by a business entity for business-related valuations may be deductible at the entity level under IRC Section 162 even when the same fees would not be deductible by the individual owner
• Basis capitalization is often the most valuable tax treatment for divorce-related valuation fees, with the fees added to the cost basis of property received in the settlement and reducing future capital gain on sale
• The Tax Court has consistently disallowed deductions for divorce-related legal and professional fees in personal contexts, even before TCJA, with the leading cases including Gilmore v. United States and its progeny
• Documentation requirements are strict: allocation between deductible and nondeductible portions must be supported by detailed billing, engagement letters, and the divorce decree allocating the fees by purpose
• State income tax treatment varies materially; some states still permit miscellaneous itemized deductions, creating state-level tax benefit even when federal benefit is unavailable

The pre-TCJA framework and what the 2017 law changed

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The deductibility of divorce-related expenses, including business valuation fees, was already restrictive before the Tax Cuts and Jobs Act of 2017. The TCJA suspended what remained.

Before 2018, the framework had three layers. The Gilmore origin-of-the-claim doctrine generally denied deductions for divorce-related personal expenses. Limited exceptions allowed deductions for fees connected to the production of taxable income under Section 212. The deduction was a miscellaneous itemized deduction subject to a 2 percent of AGI floor.

TCJA Section 11045 added Section 67(g) to the Internal Revenue Code, suspending all miscellaneous itemized deductions for tax years 2018 through 2025. The One Big Beautiful Bill Act of 2025 extended this suspension. The practical result: personal divorce-related expenses are not deductible on federal returns in 2026.

TCJA also eliminated the alimony deduction for divorces finalized after December 31, 2018. Under pre-TCJA law, alimony was deductible by the payor and taxable to the recipient. Post-TCJA, alimony is neither deductible nor taxable for new divorces, eliminating the most common Section 212 deduction path.

Two compounding effects work against deductibility for 2026 divorces:

Section 67(g) suspends miscellaneous itemized deductions. Personal Section 212 deductions for divorce-related expenses are eliminated.

Alimony is not taxable income, so fees to determine alimony are not connected to taxable income production. Section 212 is disallowed even where it would technically apply.

The combined effect: the average divorce litigant pays substantial professional fees, including business valuation costs of $25,000 to $150,000 in contested cases, with no federal income tax deduction available.

Narrow exceptions remain and are addressed in the following sections. The general rule, however, is no deduction.

For broader sale-during-divorce questions, see selling a business during divorce.

The Gilmore doctrine and the origin of the disallowance

The leading Supreme Court case is United States v. Gilmore, 372 U.S. 39 (1963). The taxpayer in Gilmore sought to deduct legal fees incurred to defend against his wife’s claim to half of his automobile dealership stock in their divorce. The Supreme Court denied the deduction, holding that the origin of the claim, not its consequences, controls deductibility. Because the claim arose from the marital relationship, the fees were personal expenses regardless of their effect on the taxpayer’s business assets.

Gilmore established the origin-of-the-claim test that has governed divorce-fee deductibility ever since. The test asks where the claim came from, not what the taxpayer was trying to protect. Marital claims are personal. Fees to defend against marital claims are personal. The fact that the property at stake is a business does not convert personal fees into business fees.

The pre-2018 Section 212 framework

Before 2018, taxpayers could deduct expenses paid for the production of income under IRC Section 212(1) as miscellaneous itemized deductions, subject to the 2 percent of adjusted gross income floor under Section 67(a). The most common application in divorce was fees paid to determine alimony amounts, because alimony was taxable income to the recipient and deductible by the payor under pre-TCJA law.

The framework allowed limited deductibility for valuation fees in two contexts. First, fees paid by the alimony recipient to determine taxable alimony income were deductible under Section 212(1). Second, fees paid by either party to determine the fair market value of income-producing assets could sometimes be deducted under the same provision.

The Section 212 framework after TCJA

Section 212 has historically been the primary deduction provision for income-producing activities falling short of a full trade or business. After TCJA, its practical application has narrowed substantially.

The Section 212 framework after TCJA has three categories.

Category 1: Section 212(1) expenses for production or collection of income, classified as itemized deductions. These are the standard miscellaneous itemized deductions suspended by Section 67(g). Examples: investment advisory fees, fees paid to determine taxable income, similar expenses tied to investment income. Not deductible on the federal personal return in 2026.

Category 2: Section 212 expenses attributable to property held for rents or royalties, deductible above-the-line under Section 62(a)(4). Not subject to the Section 67(g) suspension. Examples: legal fees to defend a rental lease, valuation fees for rental real estate held in divorce.

Category 3: Section 212(3) expenses for the determination, collection, or refund of any tax. Deductible above-the-line in certain contexts when paid in connection with a business or rental property tax matter. Personal tax determination fees fall under Section 67(g) suspension.

For divorce-related business valuation expenses, the applicable category depends on the underlying property and the purpose of the valuation.

A closely held operating business: Category 1 applies and the deduction is suspended.

Rental real estate in the marital estate: Category 2 may apply, with fees allocated to the rental property valuation work.

Tax basis or character of income determinations: Category 3 may apply, though the personal-context limitation typically defeats it in divorce.

Owners should work with their CPA to identify the Section 212 category applicable to each portion of professional fees.

For the broader valuation/divorce intersection, see business valuation for divorce and closely held business valuation methods.

What Section 212 actually says now

Section 212 still exists. It provides that in the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income (Section 212(1)), for the management, conservation, or maintenance of property held for the production of income (Section 212(2)), or in connection with the determination, collection, or refund of any tax (Section 212(3)).

The statute was not repealed by TCJA. What changed is the deductibility mechanism. Section 212 deductions for individuals are now classified as miscellaneous itemized deductions under Section 67(b), which means they fall under the Section 67(g) suspension. They are not deductible on the personal return in 2026.

The Section 62 above-the-line exception

Section 62(a)(4) provides an above-the-line deduction for Section 212 expenses attributable to property held for the production of rents or royalties. This means that valuation fees for rental real estate or royalty interests held by a divorcing taxpayer may still be deductible, because the deduction is above-the-line and not subject to the Section 67(g) suspension.

The narrow scope matters. The exception applies to rental and royalty property, not to closely held business interests, dividend-producing stock, or other income-producing assets. A taxpayer who owns rental real estate and pays for valuation fees to determine the rental property’s value in divorce can deduct those fees. A taxpayer who owns a closely held business and pays for valuation fees to determine the business’s value cannot, because the business interest is not rental or royalty property.

The trade-or-business angle under Section 162

The most reliable path to current deduction for valuation expenses connected to a divorce is through the business itself under IRC Section 162.

Section 162(a) allows deductions for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Unlike Section 212 deductions, Section 162 deductions are not miscellaneous itemized deductions and are not subject to the Section 67(g) suspension. They are taken at the entity level for entities and above-the-line for sole proprietors.

The application to divorce-related valuation fees works in two scenarios.

Scenario 1: The valuation has a genuine business purpose. The business commissions the valuation for buy-sell agreement implementation, succession planning, ESOP transaction, management equity grant pricing, or another business purpose. The valuation happens to be useful in the divorce, but the business need is real and independent. The business pays the fees and deducts them under Section 162. The deduction stands.

Scenario 2: The owner of a closely held business needs a valuation primarily for divorce and the business pays the fees. The IRS can challenge the business deduction and recharacterize the payment as a constructive dividend or shareholder distribution. The challenge is fact-specific and depends on the engagement letter, the report addressing, the use of the report, and the business purpose documentation. Many valuations fall into a gray area.

The defensible structure for owners who genuinely need both business and divorce uses of a valuation involves coordination at the front end.

First, the business identifies a real business need that requires a contemporaneous valuation. Examples include refreshing a buy-sell agreement valuation, updating an ESOP, supporting a new equity grant, supporting a partial redemption, or other genuine business purposes.

Second, the engagement letter is between the business and the appraiser, with the business purpose stated explicitly. The divorce use is not mentioned in the engagement letter.

Third, the report is addressed to the business and serves the business purpose. The same report can be used in the divorce proceeding as a separate matter.

Fourth, the fees are paid by the business and deducted under Section 162. The accounting reflects the business purpose.

Fifth, if the divorcing spouse needs additional valuation work specifically for the divorce, that work is engaged separately, billed separately, and paid personally. The personal divorce work is not deductible under current rules.

This structure produces partial deductibility. The business portion is deductible. The personal divorce portion is not. The allocation is the key.

For more on the role of business valuations in transactions, see closely held business valuation methods.

When the business pays the fees

The cleanest path to deductibility is for the business itself to pay valuation fees that benefit the business. The fees must be ordinary and necessary in the conduct of the trade or business under Section 162. The business gets the deduction. The owner does not.

This works when the valuation serves a business purpose beyond the divorce. Examples include valuations performed for management succession planning, for buy-sell agreement triggering, for ESOP transactions, for charitable contribution purposes, or for any other purpose where the business needs the valuation regardless of the divorce. The fact that the valuation also happens to be used in the divorce proceeding is incidental.

When the business cannot deduct

The business cannot deduct fees that are purely for the personal divorce purpose of the owner. Even if the business pays the invoice, the IRS can recharacterize the payment as a constructive distribution to the owner, which is taxable to the owner and not deductible by the business. The recharacterization risk is highest when the engagement letter explicitly references the divorce and when the valuation report is used only in the divorce proceeding.

The line between deductible business valuation and nondeductible personal divorce valuation is fact-specific. Documentation matters. Engagement letters should describe a clear business purpose. Reports should be addressed to the business and serve business uses. The divorce use should be incidental, not primary.

Basis capitalization: the most valuable path

The most valuable tax treatment for divorce-related valuation fees in many cases is not current deduction but capitalization into the basis of property received in the settlement.

Capitalization works because the fees are treated as part of the cost of acquiring the property. When the property is later sold, the basis-increased property produces less taxable gain. The fees are eventually deducted, just not currently.

The capitalization framework has several technical requirements.

Requirement 1: The fees must be paid in connection with the acquisition of property. Valuation fees paid by the receiving spouse to determine the value of property she is receiving in the divorce settlement generally qualify. Valuation fees paid by the transferring spouse to determine the value of property he is giving up generally do not qualify for the transferring spouse, though they may qualify for the receiving spouse if she ends up paying them through the settlement.

Requirement 2: The property received must be identified. The basis capitalization attaches to specific property. If the receiving spouse pays $30,000 in valuation fees and receives multiple properties in the settlement (business interest, real estate, retirement accounts), the fees must be allocated among the properties based on the work attributable to each.

Requirement 3: The fees must be documented. The engagement letter should describe the valuation work and the property being valued. The invoices should detail the time spent and the work product. The settlement agreement should reference the valuation and identify the property being valued.

Requirement 4: The capitalization treatment must be consistent. Basis capitalization is not optional; it is required when the fees meet the capitalization criteria. Treating fees as current expenses when they should be capitalized creates IRS exposure.

The IRS guidance on capitalization in divorce contexts is sparse, but the general capitalization principles apply. Treasury Regulation 1.263(a)-2 governs capitalization of acquisition costs. Revenue Ruling 67-275 and subsequent guidance support capitalization of valuation fees for property acquisitions.

For divorce-specific application, the relevant cases include Wild v. Commissioner and the broader case law on basis adjustments in divorce. The Tax Court has generally accepted basis capitalization for fees that have a clear acquisition purpose.

The practical workflow for capitalization:

Step 1: Identify which spouse will pay the valuation fees and which spouse will receive the property being valued.

Step 2: Allocate the fees among the properties being valued. A $30,000 valuation that covers a business interest, real estate, and retirement accounts should be allocated based on the appraiser’s time and work product.

Step 3: Document the allocation in the engagement letter, invoices, and settlement agreement.

Step 4: Add the allocated fees to the basis of the receiving spouse’s property as of the settlement date.

Step 5: Track the increased basis going forward and reflect it on the receiving spouse’s tax returns when the property is sold.

The basis capitalization treatment is often the cleanest tax outcome available to divorcing spouses in 2026. It produces eventual tax benefit without requiring the technical Section 212 or Section 162 analysis. For the business valuation context specifically, see business valuation for divorce.

How basis capitalization works

Basis capitalization treats valuation fees as part of the cost of acquiring property rather than as a current expense. The fees are added to the cost basis of the property received in the divorce settlement. The basis increase reduces the capital gain when the property is later sold.

Example: Wife receives 50 percent of business stock valued at $5 million in divorce settlement. She pays $30,000 in valuation fees during the divorce. The fees are capitalized into her basis, so her basis becomes the carryover basis from her husband under Section 1041 plus the $30,000. When she later sells the stock for $5 million, her capital gain is reduced by $30,000, saving her approximately $7,200 in federal tax at the 23.8 percent capital gains rate (including net investment income tax).

The Section 263 capitalization framework

IRC Section 263(a) requires capitalization of amounts paid for new buildings, permanent improvements, and other costs that produce benefits beyond the current year. Treasury regulations under Section 263, particularly Reg. 1.263(a)-2, address capitalization of acquisition costs for property. Fees paid to determine the value of property being acquired generally qualify for capitalization treatment.

The capitalization treatment is preferable to no deduction because it eventually produces tax benefit. The benefit is deferred until the property is sold, but the benefit is real. For property held long-term, the time value of the deferred deduction is less significant; for property sold soon after the divorce, the benefit is realized quickly.

Allocation between deductible and nondeductible portions

Most divorce-related valuation engagements cover multiple purposes, and the tax treatment of the fees depends on which purposes are deductible, capitalizable, or nondeductible. Allocation is the central documentation requirement.

The typical divorce-related valuation engagement covers some combination of:

Business interest valuation for marital estate division. Generally nondeductible under current rules unless the business pays for a genuine business purpose.

Personal goodwill valuation for state-specific characterization. Same treatment as business interest valuation.

Real estate valuation for marital estate division. Rental real estate valuation may be deductible under Section 62(a)(4); personal residence valuation generally not.

Retirement account valuation. Generally nondeductible; not capitalizable because the receiving spouse does not have basis in retirement accounts.

Investment portfolio valuation. Pre-TCJA potentially deductible under Section 212; post-TCJA not deductible.

Tax basis analysis. Potentially deductible under Section 212(3) if connected to a tax determination, though personal-context limitation often defeats this.

Business succession planning. Deductible under Section 162 if the business pays and the purpose is genuine.

Buy-sell agreement valuation update. Deductible under Section 162 if the business pays.

ESOP transaction support. Deductible under Section 162 if related to ESOP administration.

A $50,000 engagement covering five of these purposes might break down with $15,000 allocated to business valuation for divorce (nondeductible), $10,000 to personal goodwill analysis (nondeductible), $5,000 to real estate valuation (potentially deductible portion), $5,000 to buy-sell update (deductible if business pays), and $15,000 to retirement account valuation and other matters (nondeductible).

The deductible portion is $5,000 for the buy-sell update if the business pays under Section 162. The capitalizable portion might be $25,000 if the receiving spouse pays and adds it to her basis in property received. The remaining $20,000 is nondeductible personal expense.

The allocation must be documented. Engagement letters should describe the multiple purposes and identify which party is responsible for which portion. Invoices should detail time spent on each purpose. Settlement agreements should reference the valuation work and identify the property being acquired by each spouse.

Without contemporaneous documentation, the IRS default is no deduction or capitalization. The burden of proof is on the taxpayer claiming the tax benefit. Documentation is the primary defense.

Common allocation errors that the IRS challenges:

Lump-sum invoicing without purpose breakdown. A single invoice for $50,000 with no detail provides no allocation basis.

Retroactive allocation done after IRS audit. Allocations created after the fact are not respected.

Disproportionate allocation that doesn’t match the work performed. An allocation showing 90 percent of fees were for the deductible 5 percent of work product invites challenge.

Identical invoices for both spouses. If both spouses receive the same $25,000 invoice, the IRS challenges the allocation because the work performed was likely shared.

Owners and their divorce attorneys should coordinate with the CPA at the front end of the engagement to structure the allocation appropriately. The cost is modest. The tax benefit can be substantial.

Why allocation matters

A single $50,000 valuation engagement often covers multiple purposes: determining business value for marital estate division, determining personal goodwill for state-specific characterization, determining the value of rental real estate, supporting business succession planning, and supporting buy-sell agreement updates. Some of these purposes produce deductibility or capitalization. Others do not.

Without allocation, the IRS default position is no deduction or capitalization. The taxpayer claiming deduction or capitalization has the burden to prove that the fees were allocable to a deductible or capitalizable purpose. Without documentation, the burden is not met.

Reasonable allocation methods

The IRS generally accepts reasonable allocation methods that are documented contemporaneously. Common approaches include allocation by hours billed (if the appraiser’s time records distinguish among purposes), allocation by relative value of property valued, and allocation by relative complexity of the work performed.

The allocation should be done at the time of engagement and reflected in the engagement letter. Retroactive allocation done after IRS challenge is generally not respected. Forward-looking allocation done at the start of the engagement is generally respected if reasonable.

State income tax treatment

Federal income tax treatment is the primary focus of most divorce-fee analysis, but state income tax treatment can produce material additional benefit or burden depending on the state.

State income tax treatment of divorce-related expenses varies along three dimensions.

Dimension 1: Conformity to federal law. States that fully conform to the Internal Revenue Code generally apply the same TCJA suspension of miscellaneous itemized deductions. States that do not conform may still allow these deductions on the state return.

Dimension 2: State-specific deduction provisions. Some states have their own deduction provisions that may apply even when federal provisions do not. California, for example, retains a broader range of itemized deductions than federal law allows.

Dimension 3: Tax rates. State tax benefit depends on the state’s marginal rate. High-tax states like California (13.3 percent top rate), New York (10.9 percent), and Hawaii (11 percent) produce more state benefit than low-tax states.

The practical map for divorce-related fees in 2026:

High benefit states. New York, California, Massachusetts, Hawaii, and similar states that allow miscellaneous itemized deductions on the state return and have high marginal rates can recover 8 to 13 percent of fees through state deduction even when no federal deduction is available.

Moderate benefit states. States that allow some deductions but at lower marginal rates produce 4 to 8 percent state benefit. Examples include Minnesota, Oregon, and Iowa.

No benefit states. States that fully conform to federal law (most southern and midwestern states) produce no state benefit because they follow the federal suspension.

Zero-tax states. Texas, Florida, Nevada, and other no-income-tax states produce no state benefit by definition.

Owners in high-benefit states should specifically address the state deduction in coordination with their CPA. The state return treatment is independent of the federal return and may produce tax benefit even when the federal return does not.

The state-level analysis also affects capitalization decisions. If federal treatment is capitalization but state treatment is current deduction, the taxpayer has the option to elect different treatment on each return where state law permits. The election is complex and requires careful coordination between the federal and state filings.

Multi-state issues arise when the divorcing spouses live in different states or move during the year. The state of domicile at the time the expense is incurred typically controls, but specific state law may produce different results. Multi-state divorces are increasingly common and require state-specific analysis from the divorce attorney and CPA.

For owners selling businesses across state lines, see tax implications of selling a business for the broader state tax framework.

States that still allow miscellaneous itemized deductions

Several states did not conform their tax laws to TCJA and continue to allow miscellaneous itemized deductions on the state return. As of 2026, these states include New York, California, Massachusetts, Arkansas, Hawaii, Iowa, Kentucky, Minnesota, Mississippi, and Oregon, among others. The specific conformity status varies by year as states pass conformity legislation.

Taxpayers in these states may recover state income tax benefit for divorce-related professional fees even when no federal benefit is available. The state benefit is typically modest, ranging from 4 to 13 percent of the fees depending on the state’s top marginal rate, but it can be material on $50,000+ valuation engagements.

States with no income tax

States without income tax (Texas, Florida, Nevada, Tennessee, Wyoming, South Dakota, Washington, Alaska, New Hampshire on income, though New Hampshire taxes investment income) produce no state-level benefit for any deduction. The federal-only analysis controls.

Owners in no-income-tax states face the most restrictive deduction environment for divorce-related fees because there is no state recovery path. The federal analysis is the only path to tax benefit.

Documentation requirements for any deduction or capitalization

Whatever the substantive treatment of divorce-related fees, the documentation requirements are strict. Without contemporaneous documentation, the IRS default is no deduction and no capitalization.

The full documentation package for a defensible position includes the following elements.

1. Engagement letter. Identifies the engaging party, describes the scope of work in detail, identifies the properties being valued and the purposes served, and specifies the allocation if multiple purposes are involved. Dated at the start of the engagement.

2. Itemized invoices. Detail time spent, personnel, hourly rates, and task descriptions linked to engagement letter scope. Lump-sum invoices are inadequate.

3. Work product. Valuation reports, expert witness affidavits, and other deliverables that demonstrate the work performed. The reports should be addressed appropriately (to the business if business deduction is claimed, to the receiving spouse if capitalization is claimed).

4. Payment records. Bank records, canceled checks, or wire transfer records showing who paid the fees. The paying party generally has the deduction or capitalization right, subject to the substantive analysis.

5. Allocation analysis. If multiple purposes are involved, a written allocation analysis prepared contemporaneously by the CPA or attorney. The allocation should explain the methodology and tie to the engagement letter scope.

6. Settlement agreement language. The divorce settlement agreement should reference the valuation work, identify the property being received by each spouse, and allocate any responsibility for the valuation fees between the spouses. The settlement language supports the capitalization analysis.

7. Tax return reporting. If a current deduction is claimed, the deduction should be reported on the appropriate line of the return with supporting documentation in the workpapers. If capitalization is claimed, the basis adjustment should be tracked in the receiving spouse’s basis records for future use.

8. State return reporting. If state-level deduction is available where federal is not, the state return should reflect the deduction and the supporting documentation should be retained.

The IRS audit timeline for divorce-related fee deductions extends three years from the filing of the return, with six-year extensions available for substantial understatement and unlimited extensions for fraud. Documentation should be retained for at least seven years to cover the audit window plus a reasonable safety margin.

Common documentation failures the IRS challenges:

Missing engagement letter. Without an engagement letter describing scope and purpose, no allocation can be defended.

Lump-sum invoicing. Single invoices for the total fee with no detail support no allocation.

Inconsistent recipients. Invoices addressed to one party but paid by another, or reports addressed to one purpose but used for another, create challenges.

Retroactive documentation. Documentation created after the fact is generally not respected.

Missing settlement reference. Settlement agreements that do not reference the valuation work make capitalization arguments harder.

Owners facing significant divorce-related professional fees should engage the CPA at the front end of the engagement, not at year-end when the return is being prepared. The front-end engagement allows the documentation to be structured correctly. The year-end engagement frequently discovers that the documentation does not support the desired treatment.

Engagement letter requirements

The engagement letter is the most important document. It should identify the engaging party (spouse, business entity, or both), describe the scope of work in detail (which properties are valued, which purposes are served, which work products are produced), and specify the allocation if multiple purposes are involved.

Engagement letters drafted without input from the CPA frequently miss the allocation requirement. The result is that even when allocation would otherwise be supportable, the documentation does not exist to defend it. Front-end coordination between the divorce attorney, the appraiser, the business attorney, and the CPA is essential.

Invoice detail requirements

Invoices should detail the time spent on each task, the personnel performing the work, and the categorization of the work by purpose. Lump-sum invoices showing only the total fee are inadequate for any deduction or capitalization defense.

Best practice invoices for divorce-related valuations include date of service, personnel and hourly rate, task description, hours billed, and a category code linking each task to the engagement letter scope. The category coding allows the CPA to allocate the fees among purposes at year-end.

Working with CT Acquisitions on divorce-driven business transactions

Business owners facing divorce often need transactional advisory support alongside family law representation and tax advisory. Transactional decisions made during divorce affect business value, ownership structure, and future sale optionality for years.

The transactional advisory role covers:

Valuation methodology. The approach selected for divorce purposes (income, market, asset) affects the value conclusion and its supportability in later third-party transactions. Coordination between divorce valuation and any future sale valuation matters.

Discount and premium analysis. Closely held business interests often qualify for discounts for lack of control and lack of marketability. Application in divorce can materially affect the conclusion. The same discounts may or may not apply in a future sale, and inconsistency creates credibility issues.

Personal goodwill versus enterprise goodwill. State law varies on whether personal goodwill is marital property. The analysis affects estate division and future transferability.

Sale optionality preservation. Settlement structures that lock the owner into specific business decisions can foreclose future sale options. The transactional advisor identifies constraints and preserves flexibility.

Post-divorce sale planning. Many businesses are sold within five years of a divorce. Planning the sale during the divorce process produces better outcomes than addressing it after.

Total advisory cost for a complex divorce involving a closely held business typically ranges from $100,000 to $500,000 across all professionals. The cost is small relative to the business value at stake.

For more, see business valuation for divorce, selling a business during divorce, and divorce business valuation sole proprietorship.

The advisory role

CT Acquisitions advises business owners going through divorce on the transactional implications, including the valuation process, the tax treatment of fees, the structure of any business sale or restructuring, and the coordination with divorce counsel. The advisory role is integrated with the family law and tax teams rather than replacing them.

The typical engagement involves working with the owner’s divorce attorney, the qualified appraiser, the owner’s CPA, and the spouse’s separate counsel to produce a transaction structure that achieves the divorce settlement objectives while minimizing tax and transactional exposure.

When to engage early

Owners considering divorce or in early-stage divorce discussions benefit most from engaging advisors early. Decisions made in the first 90 days of a divorce, particularly decisions about how the business will be valued, who will pay for what professional services, and how the property division will be structured, often determine the tax and transactional outcomes years later.

Late-stage engagement is still valuable but more constrained. Documentation gaps from the early stage cannot always be remedied. Allocation decisions already made cannot easily be unwound. Front-end engagement produces materially better outcomes.

Frequently Asked Questions

Are divorce attorney fees tax deductible in 2026?

Generally no. The Tax Cuts and Jobs Act of 2017 suspended miscellaneous itemized deductions through 2025, and subsequent legislation extended the suspension. Personal divorce-related attorney fees are not deductible on federal returns in 2026. Narrow exceptions remain for fees connected to a trade or business under Section 162, fees attributable to rental or royalty property under Section 62(a)(4), and fees that can be capitalized into the basis of property received in settlement.

Can I deduct business valuation fees paid in a divorce?

Generally no for personal payments, but several narrow paths exist. If the business entity pays for a valuation with genuine business purpose under Section 162, the business deducts the fees. If the receiving spouse pays valuation fees for property she is receiving in settlement, the fees may be capitalized into the basis of that property. State-level deductions may also be available in non-conforming states like California and New York.

What is IRC Section 212 and does it help in divorce?

IRC Section 212 allows deductions for ordinary and necessary expenses paid for the production of income, management of income-producing property, or determination of tax. Post-TCJA, Section 212 deductions for individuals are classified as miscellaneous itemized deductions subject to the Section 67(g) suspension, eliminating most personal divorce-fee deductions. The exception is Section 62(a)(4), which allows above-the-line deduction for rental and royalty property expenses.

Can valuation fees be added to the basis of property received in divorce?

Yes, in many cases. Valuation fees paid by the receiving spouse to determine the fair market value of property received in divorce settlement can typically be capitalized into the basis of that property under IRC Section 263 and the related Treasury regulations. The basis increase reduces future capital gain when the property is later sold. The capitalization treatment requires contemporaneous documentation tying the fees to the property acquisition.

How did the Tax Cuts and Jobs Act change divorce expense deductions?

TCJA Section 11045 added IRC Section 67(g), suspending miscellaneous itemized deductions for tax years 2018 through 2025. The One Big Beautiful Bill Act extended this suspension. TCJA also eliminated the alimony deduction for divorces finalized after December 31, 2018, removing the most common path to deducting divorce-related professional fees. The combined effect is that most personal divorce expenses are not deductible on federal returns in 2026.

Can my business deduct my divorce valuation fees?

Only if the valuation has a genuine business purpose under Section 162. Examples include valuations for buy-sell agreement updates, ESOP transactions, succession planning, or other business uses. The valuation must serve a real business need independent of the divorce. If the IRS determines the business paid fees for the owner’s personal divorce purpose, the payment can be recharacterized as a constructive distribution, taxable to the owner and not deductible by the business.

What is the Gilmore doctrine and how does it affect divorce fees?

United States v. Gilmore, 372 U.S. 39 (1963), established that the origin of a claim, not its consequences, controls the deductibility of legal fees. Because divorce claims originate from the personal marital relationship, fees to address those claims are personal expenses regardless of their impact on business assets. The Gilmore doctrine has been consistently applied to deny deductions for divorce-related legal and professional fees, even before TCJA suspended miscellaneous itemized deductions.

Do any states still allow divorce expense deductions?

Yes. Several states did not conform to TCJA and continue to allow miscellaneous itemized deductions on the state return. As of 2026, these include New York, California, Massachusetts, Hawaii, Iowa, Kentucky, Minnesota, Mississippi, and Oregon, among others. Taxpayers in these states may recover 4 to 13 percent of fees through state deduction even when no federal deduction is available. The specific conformity status varies by year as states pass conformity legislation.

How should fees be allocated between deductible and nondeductible purposes?

Allocation should be done at the front end of the engagement and documented in the engagement letter. Reasonable methods include allocation by hours billed, by relative value of property valued, and by relative complexity of work performed. The allocation must be supported by detailed invoices showing time spent on each purpose. Retroactive allocation after IRS audit is generally not respected; contemporaneous documentation is required.

What documentation do I need to defend a deduction or capitalization?

The complete documentation package includes an engagement letter describing scope and purposes, itemized invoices with task-level detail, work product addressed appropriately, payment records, a written allocation analysis if multiple purposes are involved, settlement agreement language referencing the valuation, tax return reporting with workpaper support, and basis tracking records for capitalization. Documentation should be retained for at least seven years to cover the IRS audit window plus a safety margin.