New York (CNN) The $787.5 million settlement that Fox News agreed to pay in the landmark Dominion Voting Systems libel case is a hit number by any measure — but ultimately, the odds that the network will right end up absorbing the entire cost is highly unlikely.
Here’s why:
Settlement payments are tax deductible if the company pays out of pocket. When you run a business, much (if not all) of what you spend is considered a business expense. This includes money you spend defending the company in civil lawsuits that threaten to tarnish the company’s brand or harm its ability to make money in the future.
For income tax purposes, these expenses are deductible, assuming the business does not reimburse them through someone else and assuming the money will not be used to pay fines or penalties to the government, in which case a deduction would be denied.
In Fox’s case, a lawsuit may have damaged its reputation even more, so settling the case probably made the most economic sense. “It’s the cost of protecting your income stream and your profits, which are taxable…It’s a matter of dollars and cents,” the University’s tax law professor told CNN. of New York, Brant J. Hellwig.
Corporate income tax is also a matter of dollars and cents, not judgment of the behavior that led to the business expense in the first place. “Our income tax measures income, not probity,” said business tax expert Steven Rosenthal, senior fellow at the Urban-Brookings Tax Policy Center.
The current flat federal corporate tax rate is 21%. That means if Fox pays the full settlement — and isn’t reimbursed by any insurance coverage it might have for exactly those kinds of legal fees — it could reduce its federal tax liability by up to $165.38 million. dollars (21% x $787.5 million), says Hellwig.
Additionally, “Fox may also deduct their settlement payments for state and local income tax purposes,” Rosenthal noted.
If the case had gone to trial and Fox had lost, any compensatory and punitive damages she would have had to pay would also have been tax deductible if he had had to pay them out of pocket.
“THE [compensatory] the damages were allegedly related to conduct Fox engaged in in the course of its trade or business. The tax treatment of punitive damages is a bit more difficult, but generally those damages would also be deductible – again, because they arise from behavior that Fox engaged in in the course of its business. or its business and in order to protect its revenue stream — i.e., not to lose viewers to other outlets promoting voter fraud,” Hellwig said.
Professional insurance expenses are tax deductible. If Fox pays for an insurance policy that it expects to reimburse its settlement costs, it cannot deduct the cost of the settlement payment. “Fox cannot deduct it if he is entitled or expects a refund,” Rosenthal said.
But losing this deduction is not a loss for the company because it will recover from the insurer all that it has paid upfront in settlement money.
And he will continue to be able to deduct as a business expense the premiums he pays for such insurance, which could very well increase due to these very expensive lawsuits.