Tax Cuts And Jobs Act Limits Business Expense Deduction For Settlement of Sexual Harassment Claims

By Trey Cooper

Before settling a claim of sexual harassment or sexual abuse, Employers should consider a little discussed provision of the newly passed Tax Cuts and Jobs Acts which could affect their taxable income. Whether a settlement agreement or payment made in connection with a sexual harassment or sexual abuse claim is deductible will depend on whether the settlement or payment is subject to a nondisclosure agreement.

The Tax Cuts and Jobs Act (the "Act") was signed into law by President Trump on December 22, 2017. Employers attempting to assess how the Act will affect their business should note a significant change that could impact employment related business deductions and tax credits. While the media pundits have focused on the corporate tax rate, little mention has been made of restrictions on deductions for payments made in connection with sexual harassment and abuse claims. As a nod to the "me too" movement and high profile sexual harassment claims recently in the spot light, the Act eliminates the deduction from taxable income any settlement or payment related to sexual harassment or sexual abuse, including attorneys' fees, if the settlement is subject to a nondisclosure agreement. The Act adds to Section 162 of the Internal Revenue Code subdivision (q) which states:

(q)      Payments related to sexual harassment and sexual abuse. No deduction shall be allowed under this chapter for—

(1) any settlement or payment related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement, or
(2) attorney's fees related to such a settlement or payment.

Section 162(q) applies to all taxpayers regardless of revenue, size or number of employees as its application is not limited to subsets of employers. Neither the settlement payment to the claimant nor the attorneys' fees incurred in investigating, negotiating, litigating, and resolving the claim is deductible under Section 162(q). At face value, without the benefit of regulations or rulings from the Internal Revenue Service, employers must choose between keeping settlement of a sexual harassment or sexual abuse claim confidential without a tax benefit or keeping a tax benefit for the settlement without any confidentiality.

Employers should pay particular attention to settlements where sexual harassment allegations are being resolved in conjunction with additional claims.   Also, there is no indication as to whether a retaliation claim for reporting sexual harassment or sexual abuse would fall under the Act. Employers wishing to take preemptive measures should review their current standard release agreements to determine if revisions are necessary. For more information and assistance in complying with this recent change in the law please feel free to contact Dover Dixon Horne, PLLC.

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