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CHANGES TO TAX DEDUCTION RULES IN SEXUAL HARASSMENT SETTLEMENTS
November 07, 2018
Parsons Behle & Latimer Legal Briefings


The 2017 Tax Cuts & Jobs Act has been lauded as the most sweeping update to the U.S. tax code in more than 30 years.  Hidden amongst the more well-known provisions reducing various tax rates, is an obscure provision that has the potential to be a major tripping hazard to employers. 

The Act includes a new Internal Revenue Code provision—Section 162(q).  This new provision states that no tax deductions are allowed under section 162 for any settlement or payment related to sexual harassment or sexual abuse if the settlement or payment is subject to a nondisclosure agreement. In addition, attorney’s fees related to such a settlement or payment are not allowed as a deduction.

Prior to enactment of this change to the Internal Revenue Code, employers were generally permitted to deduct not only the payment for a settlement or judgment involving allegations of sexual harassment, but also the legal fees incurred in the defense of such a complaint. Under the new law, the determining factor for whether a settlement or payment for sexual harassment or abuse claim is tax-deductible is the presence or absence of an accompanying nondisclosure agreement. These payments remain tax-deductible if they are not subject to a nondisclosure agreement.

Employers will have to decide how important it is to keep confidential allegations and settlement of sexual harassment claims confidential and if they are willing to lose the tax deduction in settling such claims.  If an employee is asserting claims for sexual harassment and other claims, employers should consider drafting two settlement agreements and settlement payments.  One to address the sexual harassment claims, which is not confidential and another to address claims other than sexual harassment.

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