BP could write off billions in fines Deepwater Horizon spill as tax

Oil company BP has just reached an agreement to pay $18.7bn to settle all the remaining federal and state claims from the years of litigation after the catastrophic 2010 Gulf of Mexico oil spill. But thanks to provisions in the tax code, BP might be able to deduct a large chunk of that sum from its taxes.

According to tax code, when a company pays a fine, it is free to write it off its corporate income taxes unless the fine is expressly for violation of the law. Typically that is indicated by the fine being called a "penalty", meant to punish the company for wrongdoing. If the language of the settlement describes the fine differently – as "money to resolve claims", or money used for restoration, for example – the fine can be treated for tax purposes as a business expense. So the fines can be treated as though they were "just compensating for damages that happened, the same way as you were a company that cleaned someone's rugs and you spilled something on their rugs, you pay them to replace their rug", explains Phineas Baxandall, the senior tax and budget policy analyst at the US Public Interest Research Group (US PIRG), a non-profit group that campaigns against such write-offs.

So far, prior to last week's announcement, BP has paid $42bn in cleanup and claims in relation to the spill. Of that, only $4bn was explicitly marked as not tax deductible; that $4bn was for 14 criminal counts, including manslaughter for the deaths of the 11 people killed in the drilling rig explosion. In that case, the Department of Justice explicitly stated that none of the $4bn could be written off.

In the case of BP's settlement, the DOJ has yet to release the final language of the agreement, as it is yet to be finalised by the court. But in a statement, US Attorney General Loretta Lynch hinted to what might and might not be eligible for a tax write-off. She applauded the settlement as just and comprehensive, and referred to the fines as covering "Clean Water Act civil penalties and natural resource damages". Her use of "penalties" indicates that the $5.5bn of the total $18.7bn that are in response to Clean Water Act violations probably won't be tax-deductible, Baxandall says.

However a fact sheet the DOJ put out at the same time does not refer to the remaining $13.2bn of the settlement using "penalty" language. Over the next 18 years, BP will pay $8.1bn for "natural resource damages", the fact sheet states. Almost $6bn will be split between five states and several local governments to "settle claims" for spill-related "economic damages", and the remaining $600m will go to an array of other unresolved damage claims. This fact sheet is not the final agreement, but it could indicate that the remaining $13.2bn could be written off by BP. If BP does write off the remaining $13.2bn as losses of corporate income, which is taxed at 35%, the fine could amount to $8.58bn in tax deductions for the company. The actual tax value of the whole settlement, then, would be $14.08bn, not $18.7bn.

Even the $5.5bn in Clean Water Act violations Lynch referred to as a "penalty" might not be immune to tax deduction, Baxandall says, because 80% of it is set to go to natural resource restoration – something BP could use to argue that most of the fine is not solely punitive and so should not be treated as a penalty for tax purposes. She says a lack of disclosure requirements mean that we'll never know for sure what happens, because tax deduction claims on settlements are treated as confidential business information. "We wouldn't know unless the IRS challenged it in court and that court case came to light."

Earlier this year, two Senators introduced a bill to bring more transparency to the process. The Truth in Settlements Act would require public disclosure of settlement agreements that federal agencies enter into, if the agreement exceeds $1m.