Employer Penalty - Deductible?

[Snaggletooth]

The employer mandate for ACA was mercifully postponed until 01/01/15. We were starting to see some of the effects a bit early - like removing employer-furnished
health care from thousands of workers, forcing them into the exchanges, and then incurring the IRS penalty which results.

My question is about the "penalty". Invariably, at least in the short term, the penalty is much cheaper than having to furnish insurance. But will this "penalty" be
nondeductible like other tax penalties?

An argument to support deductibility is that it really is an ordinary and necessary expense. It is not incurred in the same fashion as late filing, late payment,
or negligence penalties. An employer is making a calculated decision to shed their benefit expense and incur this operational expense as an alternative. Hardly the
same as getting your hand slapped.

[ATSMAN]

MA had penalties for not providing health care under MA rules long before Obamacare and none of the penalties, Employer or individual is deductible.

Unless there is a clear cite or precedence I would NOT even suggest to any of my clients to attempt to deduct the penalty.

[TXEA]

The penalty will not be deductible.

IRC 4980H(c)(7)

[New York Enrolled Agent]

An argument to support deductibility is that it really is an ordinary and necessary expense.

Ordinary and necessary business expenses are deductible under §162(a).

However, §162(f) reads:
Fines and penalties
No deduction shall be allowed under subsection (a) for any fine or similar penalty paid to a government for the violation of any law.

I don't think you have any chance of success!!

[JohnH]

It's a facts and circumstances call. When it's in the government's favor to call it a tax, then it's a tax. But when it is in the government's favor to call it a penalty, that's what it is. Their facts are what they say are facts, our circumstances are whatever we find ourselves in after they define their facts.

[ATSMAN]

Excellent point, especially the cite.

[JohnH]

Somebody correct me if I'm wrong, but I thought the administration's lawyers argued before the Supreme Court that it's really a tax. So they call it a penalty when it suits their purposes and a tax when their back is against the wall. Nice.

[ATSMAN]

The administration argued from both sides of their mouth. It was a political hot potato and the unfortunate thing is that many of us have taken that "political narrative" into our thinking of legal/tax rules that have existed for a while.

Those of us who oppose ACA may do a great deal of harm to themselves and their client's if they let their thinking get clouded with the political narrative.

Here in MA you can have a religious objection to obtain a waiver and many of my clients ask me if they should exercise that to get themselves out of the penalty. I simply provide them a copy of the rules and offer NO More advice on that issue. It is up to them what they do!

[FEDUKE404]

Simple explanation

Somebody correct me if I'm wrong, but I thought the administration's lawyers argued before the Supreme Court that it's really a tax. So they call it a penalty when it suits their purposes and a tax when their back is against the wall. Nice.

IRS calls it a penalty, SCOTUS calls it a tax, and POTUS is on the links.

FE

[TXEA]

The power to tax comes with the power to impose a penalty. S-Corp's and partnerships generally pay no tax; however, if you file late, there is a penalty per K-1.

ATSMAN makes a good point about taking extra care to avoid the politics when advising clients and preparing returns.

[New York Enrolled Agent]

Somebody correct me if I'm wrong, but I thought the administration's lawyers argued before the Supreme Court that it's really a tax. So they call it a penalty when it suits their purposes and a tax when their back is against the wall. Nice.

I believe the Supreme Court addressed the issue in §5000A and held the individual mandate (aka employee shared responsibility payment) was in fact a tax.

TXEA addressed the employer responsibility under §4980H - different code section - I'm not sure that the Supreme Court ruled on the penalty imposed on the employer in the case. Someone correct me if I have that wrong.

[TaxGuyBill]

As TXEA pointed out, the code specifically calls it a nondeductible tax.


(7) Tax nondeductible
For denial of deduction for the tax imposed by this section, see section 275 (a)(6).

http://www.law.cornell.edu/uscode/text/26/4980H#c_7

(a) General rule
No deduction shall be allowed for the following taxes:
(6) Taxes imposed by chapters 41, 42, 43, 44, 45, 46, and 54.

http://www.law.cornell.edu/uscode/text/26/275