Deductibility of legal settlement payment on previous business sale

You would only be able to deduct business legal fees if you have a Schedule C business. See this article for more information.

Legal fees related to whistleblower claims or unlawful discrimination claims are deductible on Form 1040. See this thread for more information.

Fees charged by accountants and attorneys that are ordinary and necessary expenses directly related to operating your business are deductible as business expenses. However, legal fees you pay to acquire business assets usually aren’t deductible. These costs are added to the basis of the property.

Fees that include payments for work of a personal nature (such as drafting a will or damages arising from a personal injury) aren’t allowed as a business deduction on Schedule C (Form 1040). If the invoice includes both business and personal charges, figure the business portion as follows: multiply the total amount of the bill by a fraction, the numerator of which is the amount attributable to business matters, and the denominator of which is the total amount paid. The result is the portion of the invoice attributable to business expenses. The portion attributable to personal matters is the difference between the total amount and the business portion (figured above). See IRS Pub. 535 for more information.

Legal fees related to doing or keeping your job, such as those you paid to defend yourself against criminal charges arising out of your trade or business, may be deductible on Schedule A (Form 1040) if you itemize deductions. For more information, see Pub. 529.