Settlement of lawsuit. Is it deductible as expense?

[Jack from Ohio]

Client is an insurance agent. Lawsuit against him in 2000, he settled out of court for $6K. Can the settlement costs be claimed as business expense? I know the legal fees involved can.

Any of you more experienced folks have information or opinions?

[joelgilb]

Client is an insurance agent. Lawsuit against him in 2000, he settled out of court for $6K. Can the settlement costs be claimed as business expense? I know the legal fees involved can.

Any of you more experienced folks have information or opinions?

I would say that this was definitely business related and he can use it to offset revenues in a manner similar to Refunds and Allowances

Joel

[jainen]

>>Can the settlement costs be claimed as business expense?<<

As always, it depends on what the costs represent. They can probably be treated the same as legal fees, if they are ordinary and necessary costs of the business activity. You have not given enough background to say.

Just because a lawsuit arises in a business environment does not mean it is not a purely personal problem, so you need to understand what the claim was for, and what the settlement was for. For example, an auto accident during commute is not a business expense, even if the plaintiff goes after business assets.

[Jack from Ohio]

>>Can the settlement costs be claimed as business expense?<<

As always, it depends on what the costs represent. They can probably be treated the same as legal fees, if they are ordinary and necessary costs of the business activity. You have not given enough background to say.

Just because a lawsuit arises in a business environment does not mean it is not a purely personal problem, so you need to understand what the claim was for, and what the settlement was for. For example, an auto accident during commute is not a business expense, even if the plaintiff goes after business assets.

The lawsuit alleged fraud and deceptive business practices concerning insurance policies issued. Client chose to settle rather than pay many times that much to fight the suit in court.

[RoyDaleOne]

As previously stated legal fees follow the "Cause of Action". I would check on this one very carefully because, as a general rule, the defense of criminal acts are non-deductible (think traffic fines such as over weight ones) however, there are tort actions for this as well.

The general rule is this would be deductible because it arose in and is associated with a business activity or event.