Deduction of fines. Covid-19 related

[ATSMAN]

My client a small convenience store owner was fined $500 by the county for failing to establish proper Covid-19 procedures for a retail establishment in 2020. The order also stated that he must come into compliance within 7 days which he did and the health inspector allowed him to reopen.

I know generally speaking fines can not be tax deduction on Sch C, but a fellow accountant said that Covid related fines may be deductible. He could not provide a cite, but read that in a trade magazine or article.

What say you? Any cites?

[Rapid Robert]

Well, we have the following which at first glance seems to help, but the $500 was not paid to come into compliance, it was paid for violating the law or ordinance. The expenses he may have had to come into compliance and re-open (beyond the $500 penalty) might be deductible.

§162(f)(2) Exception for amounts constituting restitution or paid to come into compliance with law

(A) In general


Paragraph (1) shall not apply to any amount that-

(i) the taxpayer establishes-

(I) constitutes restitution (including remediation of property) for damage or harm which was or may be caused by the violation of any law or the potential violation of any law, or

(II) is paid to come into compliance with any law which was violated or otherwise involved in the investigation or inquiry described in paragraph (1),

[New York Enrolled Agent]

Also, review Reg. §1.162-21

[ATSMAN]

Thanks guys and after reading the regulations I am still not 100% sure but leaning towards a deduction because:

1) The $500 was a base fine that the county charges. It actually accrues each day after 7 days if you are not in compliance. This fellow was cheap so he used plastic shower curtains to drape around his cash register. He was told to install pexiglass partitions and have a table in front of the cash register so that customers did not touch the cash register area. Also he did not initially have those automated hand washing stations in the store. He later installed a few inside the store.

Also he has the right to appeal his fine by filing a timely appeal BUT at this point he does not want to spend any more on legal fees because his attorney will charge him way more than $500!

[Scarecrow]

You might want to look at TTB coverage of the final regulations for fines and penalties in the news article posted on 1/25/2021. It includes all of the examples in the regs. Basically, what is deductible is amounts paid to fix the problem. If the $500 has nothing to do with fixing the problem but rather simply a penalty for failing to obey, it is non-deductible.

[ATSMAN]

You might want to look at TTB coverage of the final regulations for fines and penalties in the news article posted on 1/25/2021. It includes all of the examples in the regs. Basically, what is deductible is amounts paid to fix the problem. If the $500 has nothing to do with fixing the problem but rather simply a penalty for failing to obey, it is non-deductible.

I get your point BUT as I was told the store owner can appeal that he is in compliance and has a chance to get the penalty abated. He just does not want to incur the additional legal costs associated with the appeal. I have poked around a bit more with my other clients who had a run in with the COVID police and it appears that if you simply acknowledged that you had to do more and promised to fix the problem ASAP and shut down your store immediately they would not issue the ticket. But this client is from Vietnam and has a severe language challenge. I am assuming he must have ticked off the health inspector due to language barrier.

[TAXNJ]

I get your point BUT as I was told the store owner can appeal that he is in compliance and has a chance to get the penalty abated. He just does not want to incur the additional legal costs associated with the appeal. I have poked around a bit more with my other clients who had a run in with the COVID police and it appears that if you simply acknowledged that you had to do more and promised to fix the problem ASAP and shut down your store immediately they would not issue the ticket. But this client is from Vietnam and has a severe language challenge. I am assuming he must have ticked off the health inspector due to language barrier.

Just do what you can support and put it to rest

[ATSMAN]

Just do what you can support and put it to rest

Exactly! Thanks for all the comments.