JP Morgan Chase’s deferred prosecution agreement contains an interesting twist that illustrates one of the basic rules of taxes. JP Morgan Chase agreed to pay the government $1.7M for its part in the Bernie Madoff Ponzi scheme. Generally, these types of litigation expenses and payouts are tax deductible. However, under terms of the agreement the payment is not classified as a tax deductible, compensatory payment, but as a “penalty paid to the United States government.” Penalties are not tax deductible. As such, this agreement had some unforeseen tax consequences for JP Morgan Chase that affected its earnings. The lesson for taxpayers is that penalties and fines are generally not tax deductible and it is important to have the proper classification of all payments. Contact us at Hone Maxwell LLP today if you have questions regarding your expenses and if they are tax deductible. For more tax updates and the latest news you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP.