Question

the taxpayer imports and manufactures specialty paper products for printing and design. In 2018,taxpayer was required to defend itself and its directors in legal proceedings. the taxpayer had been charged criminally with paying bribes to officials to allow them to import certain paper products from Indonesia. The charges were eventually dropped against the tax payer, but they had already incurred $40 000 in fees to their lawyer to defend against the charges in court.

Discuss the deductibility of the $70 000 expense for the tax payer

Answer 1

Yes, in this case the legal expenses of $40,000 that was incurred by the taxpayer can be deducted as an expense for the financial year 2018.

As per law when a legal expense is incurred towards operations of a business as that assessable income is produced by the business then such legal expenses can be claimed as expenses and hence will be allowable as a deduction. Also legal fees paid to help and protect your business reputation will be deemed as a business expense.

There was an alleged breach of law which was later not proved. Had the allegation of paying bribes been proved against the taxpayer he would not have been able to claim the legal expenses of $40,000 as deductible expenses. As the charges were not held the legal expenses will be regarded as expenses that were incurred to protect the reputation of the business and protect its earnings capacity as well. Hence the $40,000 legal expenses will be allowed as deductible expenses.