During the year, LittleBear, Inc. paid the Environmental Protection Agency (EPA) $750,000 related to the clean-up of a contaminated stream near the company’s largest manufacturing plant. The contamination was the result of a leaky pipe at the plant. The EPA repaired the pipe and cleaned up the surrounding area and stream. Initially, the EPA fined the company $1,125,000 ($25,000 per day for 45 days) for noncompliance with regulations. LittleBear ultimately settled the assessment for $750,000. During settlement discussions, the EPA disclosed that actual clean-up costs incurred were $450,000.

Write a memo to the files explaining the proper tax treatment of the payment, including in which tax year the deduction can be taken.