The $787.5 million settlement that Fox News has agreed to pay in the historic defamation case from Dominion Voting Systems is a blockbuster number by any measure — but when all is said and done, the chances that the right-wing network will end up absorbing the full 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. That includes the money you spend to defend the company in civil lawsuits that threaten to tarnish the company brand or otherwise harm its ability to make money in the future.
For income tax purposes, those expenses are deductible, assuming the company is not reimbursed for them by anyone else, and assuming the money isn’t going to pay fines or a penalty to the government, in which case a deduction would be disallowed.
In Fox’s case, a trial may have further harmed its reputation, so settling the case likely made the most economic sense. “This is the cost of protecting your income stream and profits, which are taxable…. It’s all about dollars and cents,” New York University tax law professor Brant J. Hellwig told CNN.
The corporate income tax is also about dollars and cents, not about judging behavior that led to the business expense in the first place. “Our income tax measures income, not probity,” said business tax expert Steven Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center.
The current flat corporate tax rate at the federal level is 21%. That means if Fox pays the full settlement — and is not reimbursed for it by any insurance coverage it may have for exactly these types of legal costs — it could reduce its federal tax liability by up to $165.38 million (21% x $787.5 million), Hellwig said.
In addition, “Fox also may deduct their settlement payments for state and local income tax purposes,” Rosenthal noted.
Had the case gone to trial and Fox lost, any compensatory and punitive damages it had to pay also would have been tax deductible if it had to pay them out of pocket.
“The [compensatory] damages would have related to conduct that Fox engaged in as part of its trade or business. The tax treatment of punitive damages is a little more difficult, but as a general matter those damages would be deductible as well — again, because they arose out of conduct that Fox took in connection with its trade or business and for the purpose of protecting its revenue stream — that is, to not lose viewers to other outlets promoting election fraud claims,” Hellwig said.
Business insurance expenses are tax deductible. If Fox pays for an insurance policy that it expects will reimburse it for its settlement costs, then it may not deduct the cost of the settlement payment. “Fox cannot deduct it if they have right or expectation to reimbursement,” Rosenthal said.
But losing that deduction is hardly a loss to the company because it will get back from the insurer whatever it paid up front in settlement money.
And it will continue to be able to deduct as a business expense the premiums it pays for such insurance, which very well may go up as a result of these very pricey lawsuits.
