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No Tax Deduction for Penalty Payments

Published: Wednesday, Feb. 15, 2017 9:34 a.m. CDT

This week the House Ways and Means Committee passed House File 19 by a vote of 23-0. The bill prohibits amounts classified as penalty reimbursements from being deducted (as charitable contributions) for purposes of Iowa personal, corporate, and franchise income taxes.

The situation comes up when an entity is penalized for the actions of one of its employees (for instance the NCAA fining a university for the actions of a coach). That coach may be required to pay the university back by making a charitable donation. Because charitable donations are deductible, that individual may be able to then write off their donation despite the fact that it was really just a reimbursement.

The Internal Revenue Code generally already prohibits these kinds of deductions in Section 162(f) of the IRC. House Study Bill 19 makes it clear that this type of deduction is also prohibited on Iowa returns.

House Study Bill 19 states that a charitable contribution or other payment is presumed to actually be a penalty reimbursement if they are made to a person or affiliate who had to pay a fine because of the taxpayer’s actions. The legislation makes this prohibition effective for tax years 2017 and beyond.

The bill will now move to the floor for further consideration.

As always, please join me at one of my legislative forums in March:

March 3 at 8 a.m. – Corydon – Farm Bureau

March 3 at 10 a.m. – Chariton – Mosaic

March 3 at noon – Osceola – Lakeside Casino

March 3 at 2 p.m. – Leon Community Center


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