This makes one thing about this new tax deduction provision clear – employers should get advice from competent counsel and tax professionals before settling any sexual harassment or sexual abuse claims.
Section 13307 of the Tax Cuts and Jobs Act states that no deduction is allowed for any settlement or payment related to sexual harassment or sexual abuse if the settlement or payment is subject to a nondisclosure agreement.
In the meantime, companies and their attorneys likely will use creative drafting of settlements to try to separate unrelated claims in order to keep the settlement of non-sexual-harassment claims confidential and retain the deductibility of payments and attorney’s fees incurred for non-harassment matters.
Deductibility of Victim’s Attorney’s Fees Another open question is whether the denial of deductibility applies only to the companies making settlement payments and their own attorney’s fees related to such settlements, or if it applies to the attorney’s fees incurred by the victim as well.
The bottom line is seek advice early and don’t use boilerplate settlement agreements without considering the tax deductibility consequences of nondisclosure provisions.
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