By Jeanne Sahadi@CNNMoneyNovember 19, 2013: 7:06 PM ET
NEW YORK (CNNMoney)
The majority of the $13 billion settlement JPMorgan struck with the government Tuesday is likely to be tax deductible, reducing the bank's financial hit.
Here's why: Many of the costs associated with corporate legal cases are treated as deductible under the tax code, in much the same way thata company's wages or equipment expenses are.
That means JPMorgan will be able to reduce its tax bill because of many of the settlement payments that it must make.
"From 1913, our tax laws have permitted companies to deduct their 'ordinary and necessary' expenses, which include compensation and restitution payments," said Steve Rosenthal, a lawyer specializing in financial institution taxation and a visiting fellow at the Tax Policy Center.
But not all types of settlement payments are deductible. For instance, companies are prohibited from deducting fines and penalties payable to the federal government.
"In 1969, Congress decided that allowing companies to deduct fines and similar penalties frustrated public policy, so it disallowed deductions for these payments -- and, separately, disallowed deductions for antitrust damages, illegal bribes, and kickbacks," Rosenthal said.
Senators Charles Grassley and Jack Reed recently introduced a bill that would narrow the scope of what can be considered deductible in such a deal.
Under their bill, all settlement payments over potential violations of the law would be considered non-deductible -- unless they meet the criteria of restitution or a payment needed tobring a company into compliance with the law.
The legislation would further require agencies to spell out what is deductible and what is not.
"If a company is paying thousands, millions or even billions in fines, it shouldn't save money for those same misdeeds. It should be held accountable," Reed said in a statement.