No Tax Deduction for Sexual Harassment Settlements Subject to Confidentiality Provision
Congress recently passed the 2017 Tax Cuts & Jobs Act which includes Internal Revenue Code §162(q). Specifically, § 162(q) provides:
- No deduction is allowed for any settlement or payment related to sexual harassment or sexual abuse if the settlement or payment is subject to a nondisclosure agreement.
- No deduction is permissible for attorneys’ fees related to a confidential sexual harassment settlement or payment.
These payments remain tax-deductible, however, if they are not subject to a nondisclosure agreement.
Section 162(q) is relevant because most, if not all, settlement agreements tend to include confidentiality or nondisclosure clauses. Ostensibly, employers confront whether to forego tax benefits in the interest of maintaining confidentiality or deduct the associated fees as business expenses. The provision appears aimed at preventing companies and their executives from avoiding public scrutiny about unlawful sexual conduct in the workplace.
There are several questions left unanswered by this new provision:
- What happens to the tax deduction for payments that settle more than one kind of employment claim? Employers are likely to structure settlements of multiple claims with an allocation of only a small amount to the sexual harassment claim in a non-confidential settlement agreement, with the remainder allocated to other claims under a separate, confidential settlement agreement.
- Is the non-deductibility of attorneys’ fees under § 162(q) only applicable to employers or to employees/victims as well? Whether the Legislature provides guidance regarding how to navigate this new provision remains to be seen.
Given the ambiguity that remains with respect to settlement of sexual harassment claims, employers should seek counsel in settling these claims.