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Settlement Payments Resolving Sexual Harassment Claims Are No Longer Tax-Deductible if Such Settlements Are Subject to a Non-Disclosure Agreement

April 30, 2018

The Tax Cuts and Jobs Act, signed by President Trump on December 22, 2017, contains a little discussed section that eliminates the deductibility of settlement payments and related attorney’s fees in sexual harassment disputes if the settlement or payments are subject to a non-disclosure provision.

Restrictions In This New Law

This new tax code section provides that no deductions shall be allowed 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.

26 U.S.C. § 162(q).

Effect on Employers and Unanswered Questions

 In light of this new section, employers will need to consider the tax implications of including a non-disclosure provision in settlement agreements resolving sexual harassment claims. Specifically, employers should evaluate whether they wish to forgo certain tax deductions that may be available to them regarding a settlement and associated legal expenses of a sexual harassment claim by including a non-disclosure provision in their settlement agreement.

Unfortunately, there are many open questions regarding the interpretation of this new law which may complicate employers’ analysis. For example:

We expect the IRS to issue guidance on this provision; however, it is unclear when such guidance will be issued. We will update this alert following the issuance of such guidance from the IRS.

In the interim, employers should be conscious of these new restrictions on tax deductibility when negotiating a settlement of a workplace dispute. If you have any questions about this new law, or the resolution of sexual harassment or discrimination claims generally, please do not hesitate to contact one of our attorneys.