Included in the Tax Cuts and Jobs Act was a provision that disallowed tax deductions for settlements between federal agencies and companies accused of wrongdoing. While previous tax law already barred deductions for criminal fines and penalties owed to the government, businesses could still deduct payments made to compensate victims or correct damages. The effect, critics said, is that taxpayers ended up subsidizing corporate misconduct.
Now, under the new law, all payments linked to a government enforcement action are no longer deductible unless they are classified as remedial (e.g., back wages, remediation of property, costs to bring the company into compliance).
The rule applies to a wide variety of government enforcement actions, such as those regarding employment, environmental impact, health care, government contracts, and other regulatory matters.