Sen. Jack Reed, D-R.I., and Chuck Grassley, R-Iowa, have introduced bipartisan legislation that would prevent businesses from deducting the money they pay to government agencies like the Securities and Exchange Commission to settle allegations of company wrongdoing.

The Government Settlement Transparency & Reform Act would stop corporations from claiming tax benefits from payments they make to resolve accusations of illegal conduct.

According to a 2015 study by the U.S. Public Interest Research Group, the biggest corporate settlements over a single three-year period amounted to nearly $80 billion, for which companies could claim deductions of at least $48 billion.

Federal law prevents companies from deducting public fines and penalties from taxable income. But under current law, companies are frequently able to write off any part of a settlement that is not paid directly to the government as a penalty or fine for breaking the law. That loophole permits some companies to lower their tax bills by claiming settlement payments to non-federal entities as tax deductible business expenses. There’s no consistent, transparent way to track how the settlements can and will be treated by businesses for tax purposes.

The bill introduced by Reed and Grassley would amend the tax code to require the federal government and the settling party to reach clear agreements on how to treat settlement payments for tax purposes. They originally introduced the bill in 2015 amid reports that BP could write off many of the penalties incurred by the Deepwater Horizon oil spill (see Senators introduce bill to stop corporate penalties from becoming tax write-offs). They reintroduced the bill Monday in the new congressional term as lawmakers prepare for a major tax overhaul. Reed and Grassley reintroduced another bill last month from a previous Congress to make PCAOB disciplinary proceedings against auditors and auditing firms public (see Senators reintroduce legislation to make PCAOB disciplinary proceedings public).

“There shouldn’t be a tax write-off for corporate wrongdoing,” Reed said in a statement. “This bipartisan bill would close the so-called “settlement loophole” that currently allows bad corporate actors to write off billions in fines. Companies that break the law shouldn’t get a tax break, they should be held accountable. The law needs to change to ensure that taxpayers aren’t subsidizing corporate misdeeds. Even as punitive settlements grow in size, the punishment is being diluted in the form of tax savings for the wrong doer. If the status quo continues it means taxpayers are being asked to subsidize more corporate wrong doing and that is unacceptable.”

The legislation would clarify which settlement payments are considered punitive, and thus non-deductible. The bill would require the government to file a return at the time of settlement accurately spelling out the tax treatment of the amounts to be paid by the business. It would exempt any amounts paid by corporations in the form of restitution for damages caused by the violation of any law.

“A penalty should be meaningful or it won’t have the deterrent effect it’s supposed to have,” Grassley said in a statement. “Federal agencies too often don’t consider the tax implications, but you can be sure the company does. The government should understand this. The public should be accurately informed of the real penalty even when taxes are considered. This bill will ensure that government agencies think of the tax consequences in settlements going forward and increase transparency for the public.”

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Michael Cohn

Michael Cohn

Michael Cohn, editor-in-chief of AccountingToday.com, has been covering business and technology for a variety of publications since 1985.