The recently enacted 2017 Tax Act (known unofficially as the "Tax Cuts and Jobs Act") amended the Internal Revenue Code to disallow an income tax 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 provision also disallows any deduction for "attorney's fees related to such a settlement or payment." The new law is effective for amounts paid or incurred after December 22, 2017.
As written, the provision raises many unanswered questions, including how payments made after December 22, 2017, are handled if made under settlements finalized before December 22, 2017; when a settlement or payment is "related" to sexual harassment or sexual abuse, especially if (as is frequently the case) multiple claims are being made; and when a payment is "subject to a nondisclosure agreement." What about nondisparagement, generic confidentiality, or even nondisclosure provisions that do not apply to the sexual harassment or abuse claim?
There are opportunities to minimize the potential impact of the provision, pending further clarification. We urge anyone who is settling a claim that includes sexual harassment or abuse allegations to seek review by a tax professional before negotiating the final terms of any proposed settlement, or if the case has already settled but payments are being made after December 22, 2017. It may be that in any given case the nondisclosure obligations of a settlement agreement are more important than tax deductions, but it is best to be informed of the possible ramifications when reaching the agreement, rather than finding out about them after the fact.