U.S. President Donald Trump signed into law the U.S. Tax Cuts and Jobs Act of 2017 (Act) on December 22, 2017. The Act contains a provision that will change how employers are taxed when settlement is reached in sexual harassment and sexual abuse cases. You can expect that settlement negotiations between employees and employers may become more difficult because employers must now choose whether to deduct the settlement as a business expense or keep sexual harassment/abuse allegations confidential.
The U.S. Tax Code has a provision allowing businesses to deduct certain ordinary and necessary expenses paid or incurred during the year as part of running the business. This section previously included tax deductions for confidential settlements and for attorney’s fees incurred in defense of sexual harassment allegations. In response to the ongoing #MeToo sexual harassment awareness movement, a senator proposed an amendment stating: “[c]orporations should not be allowed to write-off workplace sexual misconduct as a normal cost of doing business.”
As a result, the Tax Code no longer allows employers to receive a business deduction for “(1) any settlement or payment related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement, or (2) attorney’s fees related to such a settlement.” That means that if an employer requires an employee to sign a nondisclosure agreement as a condition of a sexual harassment settlement, or the settlement agreement contains a confidentiality provision, then an employer cannot claim the settlement payment nor corresponding attorney’s fees as a business deduction.
This provision applies to amounts paid or incurred after December 22, 2017. There is not yet guidance from either the Internal Revenue Service or the courts on how to interpret this provision. If you are contemplating settlement of a sexual harassment or abuse claim, meet with your Ally Law tax and/or employment lawyers to analyze the tax implications for your business, as well as broader questions regarding your employment policies and procedures. If you have not recently evaluated your employment discrimination policies, this Tax Code change may provide the incentive for doing so. For more information about our services in this area, contact us at firstname.lastname@example.org.