January 13, 2015

Another proposed bill to eliminate federal tax deductions for payments of punitive damages

Senator Patrick Leahy (D-VT), a member and former chairman of the Senate Judiciary Committee, issued a press release today announcing that he has introduced a bill that would prevent taxpayers from deducting payments of punitive damages as business expenses.

The proposed bill is entitled the No Tax Writeoffs for Corporate Wrongdoers Act.  The title is a bit misleading, because the actual text of the proposal would apply to all taxpayers, not just corporations.  Individuals get hit with punitive damages too, as many of the reports on this blog attest.  I'm not a tax lawyer (though my first law job was with the IRS), but my understanding is that current law permits self-employed individual taxpayers to deduct payments of punitive damages as business expenses.

Several other lawmakers have proposed the idea of eliminating the deductibility of punitive damages in recent years, both in California and at the federal level.  None of the previous proposals were adopted, although President Obama has voiced his support for the idea.

UPDATE: For those you might want to track the progress of this proposal, be aware that it has been designated as Senate Bill 169.

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