Hello,

I am currently writing an essay regarding the tax treatment of provisions* and contingent liabilities in various countries across the world

I would appreciate it if someone answers the following question:

Do the tax authorities in the US allow the deduction of expenses incurred following the recognition of a provision or a contingent liability?

*A provision is a liability that is of uncertain timing or amount, to be settled by the transfer of economic benefits

For instance, suppose a firm faces a lawsuit. The firm is expecting to pay 1000 pounds with a probability of 80%. As a result, the firm recognizes both a liability and an expense in its financial statement. Can the firm deduct this expense from its income for tax purposes?

Another example is taken from IAS 37 ( I understand that IAS 37 is irrelevant for US companies-it's just an example)
Firm sells goods with a warranty under which customers are covered for the cost of repairs of any manufacturing defects that become apparent within the first six months after purchase. If minor defects were detected in all products sold, repair costs of 1 million would result. If major defects were detected in all products sold, repair costs of 4 million would result. The Firm’s past experience and future expectations indicate that, for the coming year, 75 per cent of the goods sold will have no defects, 20 per cent of the goods sold will have minor defects and 5 per cent of the goods sold will have major defects. In accordance with paragraph 24, an entity assesses the probability of an outflow for the warranty obligations as a whole.

The expected value of the cost of repairs is (the exact number does not matter)
(75% of nil) + (20% of 1m) + (5% of 4m) = 400,000

Can 400,000 be deducted from the firm income for taxation?

In addition, please refer me to a formal source (a law or a court ruling) regarding this issue.

Thanks in advance,
Michael