After Kramer concocts an insurance scam to get the United States Postal Service to pay for Jerry’s new stereo, he claims that the $400 payment on the insurance claim is just a “write-off” for the independent federal agency. Is it actually a write-off? Does anyone even know what a write-off is?
Let’s start with the first question. Jerry and Kramer certainly don’t know what a write-off is, but by the end of this paragraph, “they do” and you will too. Simply put, a write-off is another term for the deductions a person, business, or corporation can take to reduce their taxable income when filing their taxes. For individuals, these can be things like charitable donations to a relief fund for the Krakatoa eruption, while for businesses write-offs are things like employee salaries or other business related expenses like purchasing an Aristotle goose down tunic. For example, if Elaine makes $100,000 in income at Pendant Publishing but donates $20,000 to the Human Fund in honor of George, then Elaine’s taxable income is only $80,000 because she can write-off the $20,000 donation from her income. Similarly, if the Yankees fly George out to Akron, Ohio, for a meeting, they can write-off the cost of the travel expenses from the team’s taxable business income. Or when Jerry buys suspenders for his show in The Butter Shave, he can write-off the cost of the suspenders from his taxable income because they were a business expense. Write-offs are the kinds of expenses that can be deducted from a person’s, business’, or corporation’s taxable income in order to reduce that entity’s total taxable income.
Now that we know what a write off is, can the Postal Service just write off the payment they made to Kramer for Jerry’s broken stereo? According to Code 162 of the Internal Revenue Code, in order for a business to be able to write-off an expense, the expense must be one that is “ordinary and necessary” for the business. The Supreme Court has further defined this to mean that “ordinary” expenses are those that are normal or customary in the particular trade or business, while “necessary” expenses are those that are helpful or appropriate for the business. These “ordinary and necessary” expenses can be general things like purchasing office supplies, or more specific kinds of expenses depending on the business. The Yankees would be able to write-off baseball equipment purchased for the team, but if Pendant Publishing did so it would have some inconsistencies to straighten out. (This is an issue Elaine runs into in The Chicken Roaster when she buys a hat for George using the company expense account.)
Would paying out on an insurance claim be considered a “necessary and ordinary” business expense for the Postal Service? Although there isn’t much case law that helps to determine this issue, it would certainly seem that it is an “ordinary and necessary” expense. Even Postal Employee Newman would admit, despite his initial protestations, that packages frequently get damaged during shipping. Therefore, it seems very likely that the Postal Service could just write-off the cost of the insurance payment it made to Kramer because it is an ordinary and necessary expense.
Even if the Postal Service can not write off the insurance claim under Code 162, it may able to do so under Code 165 by considering the payment to be a “loss.” This section of the tax code allows businesses, or individuals, to write off losses that are connected to a trade or business. When an insurance company makes a payment on a claim, Code 832 treats this as a loss that can be written off from their taxable income. Under this model, the Postal Service could write off the payment to Kramer as a loss, the same way that an insurance company would.
Under either of these provisions of the tax code, it certainly seems like the Postal Service will be able to write off the $400 it paid to Kramer. But just because the Postal Service can write it off, doesn’t mean that it won’t still be losing out in Kramer’s sordid little affair. The highest bracket of the U.S. Corporate tax rate in 1996, the time of The Package, was 35%. By writing off the insurance payment, the Postal Service will be able to deduct $400 from its taxable income. At a 35% tax rate, this means that it will save $140 on its taxes by writing it off the payment. But that’s still much less than the $400 they would have had had it never had to pay to Kramer in the first place. So yes the write off will help the postal service, but it’ll still be out $260 because of Kramer’s mail fraud scheme.
A final note: The Postal Service does not actually pay income tax. Instead, Section 402 of the Postal Accountability and Enhancement Act of 2006 requires the Postal Service to compute it’s income tax and then pay itself in order to help fund the agency. It’s sort of like a revolving door of funding. Given this, it’s hard to actually understand whether the Postal Service can even take a write-off at all.
Needless to say the tax code is a monster, a monster so vile …..