Tax Reform Excludes Deductions for Sexual Harassment Settlements Subject to NDAs

Among the new exceptions to business deductions legislated by the recently enacted Tax Cuts and Jobs Act (TCJA) are deductions for any settlement, payout, or attorney fees related to sexual harassment or sexual abuse if such payments are subject to a nondisclosure agreement. Section 13307 of the TCJA amends Section 162(q) Trade or business expenses of the tax code. The provision is effective for amounts paid or incurred on or after the date of enactment (December 22, 2017). Employers entering into confidential settlement agreements for employee claims of sexual harassment or sexual abuse will not be able to deduct the related expenses.

At the same time, as momentum to expose sexual harassment reaches unprecedented strength in the current #TimesUp environment, several states have introduced bills to ban confidentiality provisions in harassment settlements and/or employment contracts, including New York, Pennsylvania and California.