Question

Tax question:A corporation was found guilty of selling food that contain bacteria. This corporation had to pay a 10 million dollars fine (penalty). This corporation also forfeit 15 million dollars from selling product, and government distributed the money (forfeitures) to the consumers who had purchased food of this corporation. The corporation also spend 10 million dollars to improve its product. For those payments, is there any deductible amount for this corporation on tax purpose? If so, from which tax laws?

Answer 1

The Internal Revenue Service clarifies that fines and penalties from civil violation of local laws as well as from criminal violation are nondeductible. Consequently, companies can’t convert nondeductible fines into deductible settlements, either. The fine or penalty portion of any settlement agreement keeps the same nondeductible treatment as if the actual fine or penalty had been assessed. Fortunately for businesses, settlement agreements often provide little guidance on what portion of payments are specifically for fines.

The exclusion to the general deductibility rule does not extend beyond the fine or penalty itself. Any legal fees related to defense in the prosecution or civil action are completely deductible, as are related court costs, stenographic and copying costs. Additionally, any award the court orders outside of the statutory fines and penalties can be claimed as business expenses.