January 5, 2018
Authored by: Jay Warren
The recently enacted Tax Cuts and Jobs Act eliminated a business expense deduction for settlements of sexual harassment and sexual abuse claims that are subject to confidentiality restrictions. Specifically, a “settlement or payment related to sexual harassment or sexual abuse,” and the “attorney’s fees related to such a settlement or payment,” are no longer a deductible business expense “if such settlement or payment is subject to a nondisclosure agreement.” IRC §162(q) (added to the IRC by §13307 of the TCJA). Section 13307 became effective on December 22, 2017.
This new Code provision raises many questions, which the IRS has not yet addressed, including:
What is the impact of IRC §162(q) on the settlement process for sexual harassment or sexual abuse claims?
Employers will need to weigh the additional costs of a nondisclosure provision, which include the tax on the settlement payment and related attorney’s fees, and the value of a nondisclosure provision to the employer with respect to the specific claim asserted by an employee. Rather than “boilerplate” in a settlement or separation agreement, nondisclosure provisions will need to be assessed on a case-by-case basis.
Attorneys for both employers and employees will need to track time separately for “attorney’s fees related to such a settlement,” since an employer may determine that a nondisclosure provision is an essential term of the settlement, and then neither the employer’s nor the employee’s attorneys’ fees related to the settlement will be deductible.
What attorney’s fees are “related to such a settlement”?
Certain fees appear