Question: What kinds of lawsuits are tax-deductible?
Answer: The costs associated with a business lawsuit can be exorbitant, from everything from hiring attorneys to paying damages.
The good news is that these payments are generally deductible business expenses (considered costs incurred in the ordinary course of business).
In the contest of business, personal expenses are not tax-deductible. So, how do you know what is a personal expense? Generally, the origin of the claim must arise from profit-seeking business activity. If a lawsuit does not stem from a business activity, the legal fees and settlement costs will not be deductible.
If the lawsuit derives from a business activity, any legal fees or court costs incurred will be deductible, as well as the cost of resolving the lawsuit. However, fines and punitive damages are not deductible.
As part of the Tax Cuts and Jobs Act, companies are now precluded from writing off litigation expenses paid or incurred after December 22, 2017 in harassment or sexual abuse cases subject to non-disclosure agreements. The precluded deduction applies to any attorneys’ fees, payment, or settlement related to the case. While companies are generally inclined to conceal these types of lawsuits with confidentiality agreements, the new law creates a tax consequence for doing so.
Comment: Just as the costs incurred to create, acquire, or protect a capital asset are not immediately deductible, the costs associated with litigation regarding the acquisition of a capital asset (or defense of title to a capital asset) may be characterized as capital expenditures. Whether such costs are considered capital expenditures is determined by the activity from which the litigation arises.
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