The recent passing of the Tax Cuts and Jobs Act will reduce the corporate tax rate, but what may matter more to companies in highly regulated industries is how one of its provisions changes what EPA settlement expenses can and can’t be deducted.
Specifically, the Act may have significant impacts on administrative and judicial settlements between companies and the U.S. Environmental Protection Agency (EPA) and the U.S. Department of Justice (DOJ).
Since 1969, Section 162(f) of the Internal Revenue Code has prevented companies from deducting any fines or penalties paid to the government for the violation of any law, including environmental laws. Other “ordinary and necessary expenses” associated with environmental litigation could be deducted, however.
The Tax Cuts and Jobs Act establishes that only certain amounts may be deducted and only if they are specifically identified in a court order or settlement agreement with the government. Further, the Act generally disallows deductions for any amount paid or incurred to the government resulting from the violation of a law — not just those expressly named as fines or penalties.
Two exceptions exist. Deductions will be allowed for:
- Costs related to restitution, including property remediation, for damage or harm that was or may be caused by the violation of any law or the potential violation of any law
An example of EPA settlement expenses associated with “restitution”? Expenses associated with the defendant-initiated remediation of hazardous substances under the CERCLA or hazardous wastes under the RCRA.
- Costs paid in order to come into compliance with any law that was violated or involved with the inquiry or investigation
An example of expenses associated with “coming into compliance” with the law? EPA settlement expenses associated with injunctive relief, which are often the most important and costly elements of major Clean Air Act and Clean Water Act environmental settlements with the government.
To be clear, some things remain the same. For instance, costs directly associated with civil penalties, criminal penalties and stipulated penalties are still non-deductible. So too are costs associated with supplemental environmental projects (SEPs). As it stands, the EPA and the DOJ still need to issue guidance to better define the scope of exclusions so companies can calculate their liability.
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