Hello --

I had a penalty assessed to an LLC of which I'm a member. I'm taking personal responsibility for the penalty for payment. I'm wondering how the penalty gets taxed or viewed in relation to the entity.

1. Can the penalty be deducted from future draws?
2. Any benefit to having the the penalty instead be paid from a personal account?

Your help is appreciated. Thanks.

#1; The IRS imposes penalties for late payment of tax, for late filing of a tax return, or both. The IRS also charges interest on any unpaid tax. Business and regular taxpayers can never deduct tax penalties imposed by the IRS or any other taxing authority. The IRS does not want to give any taxpayer an incentive to break the law. If your return is audited and the IRS determines you owe additional tax, you usually have to pay penalties and interest on this amount. You cannot deduct these penalties from your next tax return, nor can you deduct the additional tax you owe. The IRS reasons that you would have paid this tax anyway and would not have had to pay interest if
If you receive penalties for not fulfilling a government contract on time, you may be able to deduct them as business expenses. For example, if you work in the construction industry and a building is not ready by the contract date, you can deduct penalties from your taxes as a business expense. These penalties are not due to misbehavior on your part but to circumstances beyond your control. However, you cannot deduct other penalties related to the construction business, such as penalties for failure to comply with building codes. Tax code only allows taxpayers to claim deductions on penalties and interest assessed for the current tax year, so if you paid a penalty for 2012 taxes during the 2013 tax year, those amounts can't be claimed as deductions, nor can interest accrued for unpaid taxes in previous amounts be claimed. Because many penalties are paid in a successive tax year than the one in which the infraction occurred, many individuals can't deduct penalties.


#2; Asmentioned above. As of 2011, the IRS does not allow you to deduct penalty because it wants to discourage taxpayers from filing incorrectly to avoid paying taxes.