Tax Treatment for Sexual Harassment Settlements under the Tax Cut and Jobs

Tax Treatment for Sexual Harassment Settlements under the Tax Cut and Jobs Act (TCJA)
The 2019 tax season has since come and gone and people have generally become comfortable with the new laws; however, an area that has undergone a significant change, but still remains rather obscure is Sec. 162(q), which addresses the tax deductibility of expenses related to sexual harassment settlements. These changes have important consequences for how sexual harassment cases are handled and not being aware of them can lead to disastrous consequences for you or a client.

Before TCJA and Now
For years past, it had been the case that sexual harassment/abuse lawsuits and claims against employers were subject to confidentiality and nondisclosure agreements. Therefore, employers treated payout settlements, including attorney fees, as deductions and the whole ordeal fell under the ordinary and necessary requirements of doing business.

The new law said no more of that. The Internal Revenue Code includes additional language that can be found at  Section 13307 of the TCJA . This change amends Internal Revenue Code Section 162(q), which states for payments related to sexual harassment/abuse:

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 a settlement or payment.

There was obvious intent under this new law that harassers get treated punitively and that victims receive proper restitution. On the other hand, it is important to note that recipients of settlements from sexual harassment or abuse, whose settlement or payment is subject to a nondisclosure agreement, are not precluded by section 162(q) from deducting attorney’s fees related to the settlement or payment.  Namely, attorney’s fees would come out of any taxable settlement and reduce the amount to which the tax collector is entitled.

Decoding the New Tax Law
Although Code Section 162(q) of the TCJA seems brief and easy to understand, any settlement of claims involving sexual harassment and/or abuse needs to be carefully reviewed by a qualified tax advisor.  This is especially true because this Internal Revenue Code is fairly new and can be ambiguous in certain circumstances. The qualified and experienced team at Dallo Law Group is here to help. Our attorneys are experts in these areas of tax law, especially the TCJA, and hold CPA licenses as well. It is imperative to find the implications and consequences of your decisions and how they impact your tax liabilities. One mistake can lead to profound trouble and could cost you unnecessary tax liabilities and grief. Dallo Law Group is always happy to provide you with guidance and expertise. As always, your first consultation with us is free. Give us a call today: (619) 795-8000.