Tax Deductions No Longer Allowed for Confidential Sexual Harassment Settlements
Posted April 23, 2018

Employer must now account for the federal Tax Cuts and Jobs Act of 2017. Under Section 13307 of the Act, no deduction is allowed for any settlement or payment related to sexual harassment or sexual abuse claims if the settlement or payment is subject to a nondisclosure (confidentiality) agreement. The new provision also prohibits a tax deduction for attorney’s fees related to confidential sexual harassment settlements or payments. The inability to deduct such expenses applies to amounts paid or incurred after December 22, 2017.

The new tax policy is likely in response to the recent increase of sexual harassment and abuse claims being made public.

The language of the provision is unclear as to what is meant by any settlement or payment “related” to sexual harassment or sexual abuse. The new tax law does not affect settlements for state or federal claims related to other employment causes of action such as retaliation, discrimination, and employment law tort claims. This complicates matters due to the fact that sexual harassment claims are often alleged along with other types of employment law claims.

The bottom line is that the new tax law presents significant considerations for employers facing sexual harassment claims. Employers should not rely on boilerplate settlement or severance agreement language to resolve such claims without considering the tax implications of confidentiality provisions. Employers should familiarize themselves with the new tax provisions and seek legal advice prior to settling sexual harassment claims.

Disclaimer: We are advising you of the new tax provisions for informational purposes only. This information is not intended as tax or accounting advice. You should consult your own tax and accounting advisors concerning the application of this new law.

For questions regarding any employment law matters, contact the employment attorneys at LightGabler.