The new tax law disallows tax-paying entities from taking a deduction for sexual harassment settlements that are subject to non-disclosure or confidentiality agreements. In other words, if a company wants a confidential settlement, the company has to pay taxes on the settlement, fines and other expenses incurred. Conversely, the only way such settlements can be written off and not taxed is if they are not confidential and, therefore, discoverable.
The relevant portion of the new law reads as follows:
No deduction shall be allowed under this chapter 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 settlement or payment.
Under the law as written, no taxpayer (neither the complaining party nor the respondent) can write off the settlement reached in a sexual harassment case if the settlement is confidential. Previously, the party sued (employer) could write off the settlement amount regardless of the confidential nature of same. Now, the party paying the settlement cannot deduct the settlement if confidentiality is required.
The idea behind the change was that companies should not be able to keep a settlement confidential (perpetrating a culture where claims of sexual harassment are quietly settled and swept under the rug) and benefit from a tax deduction. Still, the reality is that most companies will forego the deduction to ensure confidentiality. Employers are strongly encouraged to seek the advice of employment law and tax counsel to properly document such settlements.
As an aside, note that settlements of claims against members of Congress will not be subject to this provision since the US government is not a taxpayer.
Please feel free to contact me if you have any questions or comments. Here’s wishing everyone a happy, healthy and prosperous 2018!
Ellen is a Florida Board Certified Labor and Employment Attorney with Assouline & Berlowe, P.A.
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