How to turn an opioid lawsuit settlement into a tax deduction

Several pharmaceutical and health care companies collectively have agreed to pay hundreds of millions of dollars to state governments to end lawsuits stemming from the country’s opioid epidemic.

Tax law experts say these settlements appear to be structured to enable the companies to deduct the payments from their taxable corporate income – which would reduce the cost to the companies.

"It's not pretty, but the tax lawyer's job is to try to be inventive," said Robert Wood, a tax lawyer at Wood LLP in San Francisco and author of a book on taxation, damage awards and settlement payments.

There are always gray areas, he said, but "there certainly are times when tax lawyers have to, or certainly should say, 'You know what, there's not even an argument for this.'"

'Clearly a game.': Opioid lawsuit settlements appear aimed at giving tax breaks to drug firms, experts say

This is not a new practice. For years, corporations have deducted the cost of such settlements on their corporate tax returns.

The 10 largest corporate settlements reached with five federal agencies from 2012 to 2014 required the companies to pay nearly $80 billion to resolve allegations of wrongdoing, according to a 2015 Public Interest Research Group Education Fund study.

But the companies – which included pharmaceutical and financial firms – could write off at least $48 billion as tax deductions, the study showed.

In 2017, Congress used a major tax-cut package to try to curtail this practice.

Among the many provisions of the law was a section that made it harder for corporations to seek tax deductions for settlements with government agencies.

But there were a few exceptions, including one for settlement payments deemed to be "restitution." Remember that word.

The effect of that law is now becoming clear.

In June, Teva Pharmaceuticals USA settled a lawsuit with the Oklahoma Attorney General’s Office. The company was accused of exaggerating the effectiveness of its opioid pain medications and understating the risk of addiction.

Teva agreed to pay $85 million, but it didn't acknowledge any wrongdoing.

Lawyers for both sides agreed the payment should be classified as restitution.

That wording opens the door for Teva to seek a tax deduction for the settlement payment, tax experts said. How much the company might save is unclear.

Settlements with Purdue Pharma and McKesson appear to be structured in other ways that would allow them to seek tax write-offs for some portion of their payments. For more on those arrangements, read our story.

This article originally appeared on USA TODAY: Graphics: Drug companies could deduct opioid settlements on taxes