An estimated 40,000,000 (yes, 40 million) lawsuits are filed in the U.S. each year. This massive number illustrates just how likely it is that businesses will, at some point in the course of operations, face a lawsuit of some kind.
Ultimately, this does not mean your business is the bad guy. It does not mean you’ve even done anything wrong. When your company faces financial liability in litigation, however, it can dig deep into business finances and put your work at risk.
We want to hand you a small piece of good news – that lawsuit and the associated fees you paid out can be tax deductible as business expenses. Understanding when you can write off a lawsuit and certain fees associated with it can help you recoup some of the loss.
Business vs. Personal Matters
One of the key elements for a lawsuit to be considered tax-deductible is that the incident in question occurs during the normal operation of the business or in an extracurricular event that’s intended purpose is to generate profits.
For example, if you are sued because an executive unfairly targeted and fired an employee then the resulting litigation would be tax deductible as an expense of doing business. However, if an executive has employees over for dinner for a personal event that is unrelated to the business and someone gets injured and files a lawsuit then the resulting costs would not be considered a business expense and therefore not be tax deductible.
Additionally, lawsuits related to sexual harassment or sexual abuse cases paid out after December 22, 2017, cannot be deducted IF the settlement or payment has a nondisclosure agreement (NDA) tied to it.
Note that fines and punitive or penal damages from the government are not deductible expenses.
Capital vs. Speculative Losses
This extends to scenarios in which businesses are attempting to acquire or protect capital assets which would thus increase the value of the business. A lawsuit attempting to prevent this from occurring, such as an antitrust suit attempting to prevent an M&A deal, would be considered tax-deductible litigation. However, if someone attempts to sue a company because they claim the actions of the business lessen the value of their own assets then the resulting litigation would not be considered tax deductible.
How Will Your Payout Be Taxed?
All of this comes with a completely opposite tax consideration, as well. A company or individual that receives a judgment or settlement in an applicable business lawsuit may owe taxes on the resulting payout.
If you are suing for lost wages and recoup those lost wages, the payment you receive would be taxed as a wage according to your tax bracket (and other taxes may apply to the part of the amount not attributable to wages). If you are suing to be made whole from expenses you have already paid and been taxed on, there will be no additional tax charges on the payment you receive.
Understanding when and how to deduct a lawsuit or pay the appropriate taxes that result from a lawsuit requires the careful attention of a tax attorney. The team at the Law Offices of Tyler Q. Dahl understands tax law and can help you form an effective tax strategy that includes every possible avenue – including deducting expenses from a lawsuit filed against you. Contact our team and we’ll help you and your business optimize your strategy.
Dahl Law Group
