It is a fact of life that many companies make dubious payments in order to get business. The line between legitimate business expenses and commercial bribery can be a fine one, and while businessmen who are prosecuted for having crossed that line are rightfully most concerned with the loss of liberty and stigma associated with a criminal conviction, lawyers and accountants representing them need to be mindful of the tax consequences of their clients’ conduct.
The Internal Revenue Code allows companies to deduct expenses that are ordinary and necessary to the operation or maintenance of a business, unless they were illegal bribes or kickback payments. See 26 U.S.C. §§162(a), (c)(2). However, not all payments made to obtain business are illegal bribes and the deductibility of payments will turn first on whether they were ordinary and necessary given the specific industry at issue, and second on whether they were illegal under the applicable state or federal law.
