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.