The Tax Cuts and Jobs Act of 2017 (the “Act”) further limits deductions for fines and penalties paid or incurred to, or at the direction of, a government entity. The Act also includes new reporting requirements, which could potentially increase compliance costs and impose significant burdens on taxpayers and government entities.
Specifically, the Act denies a deduction for any otherwise deductible amount paid or incurred (whether by suit, agreement, or otherwise) to, or at the direction of, a government or governmental entity in relation to the violation of any law or the investigation or inquiry by such government or entity into the potential violation of any law. For purposes of these rules, certain nongovernmental entities are treated as governmental entities, including certain nongovernmental entities that exercise self-regulatory powers in connection with a qualified board or exchange or as a part of performing an essential governmental function.
Exceptions apply to the following:
- Restitution or Compliance Payments: An exception applies to any amount the taxpayer establishes (i) constitutes restitution (including remediation of property) for damage or harm that was or may be caused by the violation of any law or the potential violation of any law, or is paid to come into compliance with any law that was violated or otherwise involved in the investigation or inquiry; and (ii) is identified as restitution or as an amount paid to come into compliance with such law, as the case may be, in the court order or settlement agreement. Restitution for failure to pay any tax and assessed as restitution under the Internal Revenue Code is deductible only to the extent it would have been allowed as a deduction if it had been timely paid. This exception does not apply to any amount paid or incurred as reimbursement to the government or entity for the costs of any investigation or litigation.
- Court Orders: An exception applies for any amounts paid or incurred by reason of any order of a court in a suit in which no government or governmental entity is a party.
- Taxes Due: An exception applies to any amount paid or incurred as taxes due.
The Act requires government agencies to report to the IRS and the taxpayer the amount of each settlement agreement or order where the amount is at least $600 and separately identify any amounts that are for restitution, remediation of property or correction of noncompliance.
For more information and to discuss planning opportunities, please contact Sonya Jindal or any member of Taft’s Tax Practice group.