Who gains from saving nature
Ledger 1 : 33 — For each dollar financing nature-based solutions in 2023, about $33 financed activities harmful to nature. (UNEP)
Cases / Liability shifting (spin-offs, bankruptcy, closure bonds) · United States · 2017

US tax deductibility of environmental settlements (IRC 162(f))

Nature's voice · report
No measurement of the harm done to me here is on record.
Did nature suffer? Not measured.
Not on record
  • The record does not name which of my species, waters, soils or forests were harmed.
What the record lacks: 2 none on record · 1 not measured · 2 unclear See the gaps

US tax law denies a deduction for amounts paid to a government for violating a law, but allows one for amounts identified in the settlement as restitution, remediation or compliance. A 2005 GAO review found that agencies did not negotiate the point and that responding companies deducted all or part of the payment in 20 of 34 settlements.

20 of 34Settlements where responding companies deducted all or part of the payment (GAO, 2001–2002 settlements)
As reported by GAO-05-747 (2005): 34 settlements with company responses, out of 160 large settlements reviewed at four agencies.

Status As of October 2026: section 162(f) as amended in 2017 and the January 2021 regulations remain the rule described; actual deduction is documented only for the settlements named above.

What?
US tax rules decide whether payments made to settle environmental violations can be deducted from taxable income. Cornell Legal Information Institute
Where?
United States (federal tax law); settlements in California, Alaska and other states are cited.
When?
Statute amended in 2017; final regulations 12 January 2021; GAO review published 15 September 2005. US Government Accountability Office
Who?
Gained
  • Companies that deducted all or part of a settlement (20 of 34 responding in the GAO sample) — Reduced taxable income US Government Accountability Office
  • PG&E — Calculated a saving of about $468 million on its CPUC settlement
Lost
  • The US public budget — Tax revenue foregone where deduction is taken; the sources reviewed that at a 21% rate $21 of each $100 deducted comes from the public budget
Harmed
None on record
Why?
the sources reviewed that a payment's label, whether penalty or restitution, remediation or compliance, decides whether it is deductible. the sources reviewed does not give a stated purpose from the legislator.
How?
The label is written into the court order or settlement and the amount must be documented as spent for that purpose; GAO found that agencies did not negotiate the tax treatment. US Government Accountability Office
6 of 6 questions answered from the record

What happened

The record, in order.

Section 162(a) of the US Internal Revenue Code allows a deduction for the "ordinary and necessary expenses" of a trade or business. Section 162(f) provides that amounts paid to a government for violating a law are not deductible. The exception is for amounts identified in the court order or settlement as restitution, including "remediation of property", or as compliance costs.

The 2017 tax law changed section 162(f) to its current form: a payment to a government is not deductible, but an amount identified in the order or settlement as restitution, remediation or compliance, and documented as spent for that purpose, can be deducted. The reporting threshold rose from $600 to $50,000. Final regulations issued on 12 January 2021 widened the meaning of remediation for environmental cases: payments to protect or restore soil, air or water, to restore forest or to provide habitat, that are linked to the harm, can qualify even where the harm cannot be fully remedied.

The label is set when the settlement is written. A 2005 review by the US Government Accountability Office (GAO-05-747, 15 September 2005) covered 160 large settlements reached in 2001–2002 at four federal agencies, with a combined value above $9 billion. None of the four agencies negotiated the tax deductibility of the payment. Of the 34 settlements for which companies answered the survey, companies had deducted all or part of the payment in 20, and deduction was more frequent where the payment was not called a penalty.

Two company cases are on record. Pacific Gas and Electric (PG&E) said its roughly $1.8 billion settlement with the California Public Utilities Commission over the 2017–2018 wildfires was "technically not a penalty" and calculated that deducting it would save about $468 million; the same agreement contained a commitment not to pass the cost on to customers (January 2020). 3M recorded a pre-tax charge of $10.3 billion in the second quarter of 2023 for its PFAS settlement with US public water suppliers; that figure is the present value, at 5.2%, of a nominal $12.5 billion payable from 2024 to 2036, and it reduced earnings per share by $14.19. The company's total tax line for that quarter was a $2.184 billion benefit; the sources reviewed does not show how much of it belongs to this settlement.

An earlier tax treatment is recorded for the 1989 Exxon Valdez spill: under a 1991 Alaska Department of Revenue position, civil and compensatory payments were deductible and fines were not. A secondary source (the Congressional Research Service as cited by Wood, 2010) put the after-tax cost of the $1.1 billion government settlement at "$524 million".

  1. 1991Alaska Department of Revenue position on Exxon Valdez payments: civil and compensatory payments deductible, fines not
  2. 2005GAO-05-747 (15 September): agencies did not negotiate deductibility; companies deducted in 20 of 34 responding settlements
  3. 2017Tax law amends IRC 162(f): payments to government not deductible unless identified as restitution, remediation or compliance and documented
  4. 2020PG&E calculates about $468 million tax saving on its CPUC settlement (January)
  5. 2021Final regulations (12 January) widen the definition of remediation for environmental payments
  6. 20233M records $10.3 billion pre-tax charge for PFAS water-supplier settlement (second quarter)

How it looked

What was shown, beside what was recorded.

Shown

  • Court and settlement announcements give the total figure, described in headlines as "record" settlements.
    Press and agency announcements, as characterised in the sources reviewed

Recorded

  • 26 USC 162(f): no deduction for amounts paid to a government for violating a law; exception for amounts identified as restitution (including remediation of property) or compliance costs.
    Cornell Legal Information Institute
  • Final regulations of 12 January 2021 treat environmental payments linked to the harm as remediation even where the harm cannot be fully remedied.
  • GAO-05-747: no agency of the four negotiated tax deductibility in 160 large settlements; companies deducted all or part in 20 of 34 responding settlements.
    US Government Accountability Office
  • PG&E calculated a saving of about $468 million from deducting its roughly $1.8 billion CPUC settlement.
  • 3M booked a $10.3 billion pre-tax charge for its PFAS water-supplier settlement.

Who gained

Money that reached nature, beside money that stayed elsewhere.

Reached nature or the ground

Not published
No figure published.

Gained elsewhere

Not totalled
Currency: USD · Window: various. All figures cover the same period. * Estimate built from cited figures.

Responses on record

  • pge (January 2020): Said that its roughly $1.8 billion settlement with the CPUC was not technically a penalty, and planned to deduct it from tax, for a saving of about $468 million. · KTVU

In court and with insurers

Every proceeding and every insurer decision on record.

Lawsuits and rulings

No court case on record. No court has ruled on this case.

Insurers

No insurer decision on record.

What nature saw

Outcomes measured on the ground, and nature's note.

Nature's report opens this page. Below: further outcomes measured on the ground.

Responding companies that deducted
20 of 34
Settlements in the GAO sample with company responses (2001–2002 settlements)
Agencies that negotiated deductibility
0 of 4
GAO-05-747, 2005
Independent ecological evaluation
Not part of this record
The record concerns the tax label of payments, not measured outcomes for nature

What we don't know

Undisclosed, unproven, untried: recorded as data.
No court caseNo independent ecological evaluationUnder standard-setter review

Nature

  • Not measured Harm to nature: No independent ecological evaluation is on record.

Court

Record

  • None on record How much of the $2.184 billion total tax benefit in 3M's second quarter of 2023 belongs to the PFAS settlement: the sources reviewed reports that the figure is not broken out.
  • Unclear Whether the $1.2 billion tax benefit from Fire Victim Trust share sales recorded in PG&E's 2023 annual report is as stated: reported, but the relevant section of the report could be read only in part.
  • Unclear Whether and how much of BP's Deepwater Horizon package was deducted: an estimate of about $15.3 billion of $20.8 billion deductible is noted in earlier entries, with no source given here.

Did the harm stop?

The record shows a tax rule that remains in force and a 2021 regulation that widened the remediation category; it shows no measure of whether payments reached the damaged environment.

Who paid?

The record reports that a deductible payment of $100 by a company taxed at 21% costs the public budget $21 of it; actual deductions in specific settlements are mostly not established in the record.

Sources

Voices on record: — Company or project✓ Government and regulators— Courts✓ Press and investigations— Communities and civil society— Researchers

Government and regulators

  1. 26 USC 162 - Trade or business expenses
    Cornell Legal Information Institute · n.d.
  2. 26 USC 165 - Losses
    Cornell Legal Information Institute · n.d.
  3. GAO-05-747: Environmental settlements and tax deductibility
    US Government Accountability Office · 2005-09-15

Press and investigations

Connected cases

Related matters, and cases linked to this one through the same organisations, with the role each played in both.
Terms used on this page

Insurance

Deductible
The part of a loss the insured party pays itself before the insurer pays.

Science and environment

PFOA (C8) and PFAS
PFAS are a large family of human-made chemicals that persist in the environment and the body; PFOA, also called C8, is one of them and was used to make Teflon.
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