Shhh? Sexual Harassment Settlements May No Longer Be Deductible

The tax reform law that passed in December has been the topic of much discussion.  One aspect of it that has not received as much discussion is a provision which impacts whether a payment made as part of a sexual harassment settlement is deductible.

In response to the #MeToo Movement Congress included the following in the new tax reform bill:

No deduction shall be allowed under this chapter for – (a) any settlement or payment related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement; or (b) attorney’s fees related to such a settlement or payment.”

It seems clear that the intent of this provision is to remove the tax deduction from a payment made to settle a sexual harassment or sexual abuse suit  if the payment is subject to a nondisclosure or confidentiality agreement.   But several questions remain.

What if there are multiple claims being settled?  Is the entire payment not deductible if a confidentiality provision is included in the agreement, or just a portion of it? And will allocating a specific portion of the payment to the sexual harassment claim suffice, so that only that amount is not deductible?

What about the attorney’s fees? If a nondisclosure agreement is required is the deduction lost for all the fees in the case, or just the portion “related to such a settlement or payment”?

In most cases the settlement is subject to a confidentiality provision.  Congress has now given employers settling sexual harassment claims reason to pause before automatically making confidentiality a part of the settlement.  Remember to discuss this with your lawyer, and consider the pros and cons of silence verse the tax deduction,  before you make this decision.


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