Killing Tax Deductions for Bad Actions?

Killing Tax Deductions for Bad Actions?

Killing Tax Deductions for Bad Actions?It’s been said that lawsuits are the cost of doing business. Individuals and businesses may be caught in bad behavior, but often these bad actors can ease their own consequences by deducting various costs … settlements, awards, legal fees.

Consider that the settlement costs of $1.1 billion for the Exxon Valdez Alaska oil spill in 1989 really cost the company only between $463 million and $562 million … after tax because of deducting the costs.

There’s already a bar to deducting fines and penalties paid to the government. But amounts paid to individuals or other private parties? They’re deductible. And, in some situations, the IRS lets fines be treated as compensatory damages, so that they’re deductible.

Eliminating deductions for the costs associated with bad actions could go a long way to further discourage such activity and would certainly penalize them further. Here are some suggestions under consideration:

Barring companies from deducting punitive damages.

A bill proposed in Congress by Sen. Leahy (D-Vt) (S. 2115) would disallow a deduction for punitive damages in anti-trust actions. This provision relates to treble damages, one-third of which is currently deductible. What’s more, if enacted the measure would require that any punitive damages compensated by insurance or otherwise be reported as income.

Eliminating any deduction for settlements or awards for sexual assault and harassment.

Currently, it may be possible to take a business deduction for dollars paid out in civil actions or settlements to avoid litigation. I’m sure that former Fox News host Bill O’Reilly deducted the $32 million settlement he paid to a former network analyst. Recently, Rep. Comstock (R-Va) wrote to Treasury Secretary Mnuchin asking for help in finding ways to prevent deductions so that taxpayers aren’t subsidizing harassment and abuse by corporate employees.

Final thought

Do we want to eliminate all write-offs for litigation costs? Take the small business owner who’s ambushed by a frivolous lawsuit. The owner incurs legal fees and may opt to settle despite no wrongdoing because it’s less costly than litigating.

In the recent media frenzy about sexual harassment claims against some politicians and those in the media, I think we need to tread carefully to block deductions for these costs (settlements, legal fees, etc.) in every situation.


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