Are business related settlement payments deductible?

[ryanm89]

Last year I reached a settlement agreement with another business involving intellectual property and paid them an amount for the settlement. Can I deduct that as a business expense? Where in the IRS code does it explain these rules?

[ChristinaR]

Yes, amounts paid for settlements are deductible as long as the basis of the suit is in fact a business matter and not personal.  In other words, the acts that gave rise to the litigation must have been performed in the ordinary course of your business.  The settlement amounts also cannot represent fines or similar penalties paid to a government for the violation of any law.  Any amount of the settlement that is punitive in nature (designed to punish the wrong doer) instead of compensatory is not deductible. 

In TurboTax, the amount paid to your attorney is entered into "Legal and professional services."  The amount paid to the other party can be entered under "Other expenses" with a short description, "legal settlement of business dispute."

Please see this recent ruling by the IRS on the deductibility of settlement costs as ordinary and necessary business expenses: https://www.irs.gov/pub/irs-wd/1412002.pdf