On May 13, 2020, the Internal Revenue Service (IRS) proposed regulations offering guidance on section 162(f) of the Internal Revenue Code, which concerns the deduction of certain fines, penalties, and other amounts. These regulations also provide guidance on the information reporting requirements under new section 6050X of the Internal Revenue Code for those fines and penalties. These regulations establish that certain U.S. Environmental Protection Agency (EPA) fines and penalties can be deducted when those costs are paid or incurred as restitution, remediation, or to come into compliance with a law.
As amended by the Tax Cuts and Jobs Act (TCJA), section 162(f) generally disallows deductions for any amount paid or incurred to, or at the direction of, a governmental entity in relation to the violation of a law or the investigation or inquiry by such governmental entity into the potential violation of a law. However, section 162(f) also contains exceptions under which this disallowance may not apply to payments made or incurred as restitution, remediation, or to come into compliance with a law.
Proposed regulation section 1.162-21(b) provides guidance on when these exceptions apply by defining key terms, including what constitutes restitution, remediation, and amounts paid to come into compliance with a law. Here, payments made or incurred with respect to the “government or a governmental entity,” defined to include federal agencies, can constitute payments paid or incurred in restitution or remediation. Further, an amount is paid or incurred to come into compliance with a law “that the taxpayer has violated or is alleged to have violated, by performing services; taking action, such as modifying equipment; providing property; or any combination thereof.” The new regulations do not indicate whether payments made to state or local governments may also be deducted.
Proposed regulation section 1.6050X-1 describes how the government and governmental entities can comply with the reporting requirements under section 6050X of the Internal Revenue Code. This regulation requires governments and governmental entities to report taxpayer payment amounts greater than $50,000 by Jan. 31 of the year the subject agreement is entered into or the order is issued. Despite the $50,000 threshold, some stakeholders voiced concerns that it could be challenging for these entities to meet the Jan. 31 deadline. These stakeholders observe that this requirement could be particularly burdensome in the event that the deduction is also available for payments to state and local governments — especially entities dealing with a high volume of settlements.