Mike Dubetz and Steve Miller

The recently-enacted Tax Cut and Jobs Act (the “Tax Act”) includes an unheralded change to the tax law that will directly affect sexual harassment settlements.  As a direct result of the recent highly-publicized cases involving sexual harassment of employees, a new provision (Section 162(q)) has been added to the tax code to deny a business deduction for “any settlement or payment related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement.”  The new provision, which is already effective, also denies a deduction for the attorneys’ fees related to such a settlement or payment.

As a result of the new law, an employer making a settlement payment in connection with a sexual harassment case will have to balance the monetary benefit of a tax deduction against the potential harm that could be done to its business if a plaintiff is permitted to publicize the details of the settlement and the claim.