The Deductibility Fines and Penalties Has Gotten Easier Thanks to the First Circuit Court of Appeals
By Anthony Diosdi Recently, I was asked if a penalty or fine assessed by a municipality is deductible for federal income tax purposes. At first glance this appears to be an easy question to answer. The Internal Revenue Code says that no deduction can be taken for any fine or similar penalty paid to a government for the violation of the law. This may sound straightforward, that is, until you read the Income Tax Regulations and case law. The Income Tax Regulations unequivocally states that compensatory damages paid to a federal or state government does not constitute a fine or penalty. (Compensatory damages is money awarded to a government for damages, injuries, or another incurred loss). Penalties which are used for remediation purposes may also be deductible for income tax…