Getty Images

In announcing the final $20.8 billion settlement with BP over the 2010 Deepwater Horizon oil spill, Attorney General Loretta Lynch said on Monday, "BP is receiving the punishment it deserves."

What she didn't mention is that BP—which was found grossly negligent for the 2010 disaster, the worst offshore oil spill in U.S. history—will likely only pay about three fourths of that punishment once tax deductions are taken into account.

Just $5.5 billion of the settlement is a penalty under the Clean Water Act. The other $15.3 billion is other damages and payments that BP can treat as a cost of doing business, said Michelle Surka, an analyst with the U.S. Public Interest Research Group. That means that the oil giant can legally deduct 35% of this $15.3 billion from its taxes, for a total windfall of $5.35 billion.

"The value of the settlement is significantly less than it's being trumpeted in the headlines as," Surka said. "They shouldn't be able to claim that it's an ordinary cost of doing business—it's the wrong message."

The Department of Justice could have explicitly written a provision into the settlement guaranteeing that the entire $20.8 billion was not tax deductible. Not doing that may have been a negotiation point—it gives the DOJ a bigger number for its press release and lets BP tell its shareholders it's deducting a cool $5.35 billion.

Advertisement

Moreover, BP will have 18 years to pay everything off, which reduces the real amount of what they're paying—a dollar in 18 years will be worth less than a dollar today.

Lynch and the DOJ say that this is the biggest pollution settlement in American history. (It's also the worst environmental disaster in American history, with 134 million gallons of oil sent flowing into the Gulf of Mexico.)

DOJ spokesperson Wyn Hornbuckle said in an email that the non-penalty payments in the settlement (everything except the $5.5 billion) "are largely for removal costs and natural resource damages, which are not punitive or penal in nature." He said the IRS will determine whether these are deductible—but the IRS generally allows companies to deduct civil settlement payments unless the settlement explicitly forbids it.

Advertisement

BP did not respond to a request for comment.

The tax deduction tactic is fairly common in big environmental and bank settlements—when the feds settled with J.P. Morgan Chase in 2013, the bank got a $2.45 billion deduction on a $13 billion settlement.

"When the American people look at a settlement like this, where BP was found to be grossly negligent, they expect that BP is atoning," Surka said. "The DOJ should be doing more to make sure that the American public is getting a good deal."

Advertisement

If the DOJ hadn't settled, BP could have faced even steeper penalties. In January, Judge Carl Barbier ruled that the company could be liable for up to a $13.7 billion Clean Water Act penalty—far more than the $5.5 billion penalty in the current settlement.

There will now be 60 days of public comment on the settlement, after which Judge Barbier will give it final approval or rejection.

Casey Tolan is a National News Reporter for Fusion based in New York City.