Tax Cuts And Jobs Act Limits Business Expense Deduction For Settlement of Sexual Harassment Claims By Trey Cooper
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Trey Cooper is an Associate at Little Rock law firm Dover Dixon Horne PLLC. He focuses his practice on employment law, insurance defense, and commercial litigation. 32
The Arkansas Lawyer
www.arkbar.com
ccording to statistics compiled by the Equal Employment Opportunity Commission (“EEOC”), there were 6,718 sexual harassment charges filed in the United States in 2017.1 In Arkansas, from 1997 to 2017, there have been an average of nearly 146 charges of sexual harassment filed with the EEOC each year. One thing is clear: Arkansas businesses are not immune to claims based on sexual harassment. Before settling a claim of sexual harassment or sexual abuse, employers and employees should consider a little discussed provision of the newly passed Tax Cuts and Jobs Act (the “Act”), which could affect their taxable income. Whether a settlement or payment related to a sexual harassment or sexual abuse claim is deductible will depend on whether the settlement or payment is subject to a nondisclosure agreement. This new provision regarding nondisclosure and settlement of sexual harassment or sexual abuse claims should be considered before settling any claims related to sexual harassment or sexual abuse. The Tax Cuts and Jobs Act was signed into law by President Trump on December 22, 2017. Employers attempting to assess how the Act will affect their business should note a significant change that could impact employment-related business deductions and tax credits. While the media pundits have focused on the corporate tax rate, little mention has been made of restrictions on deductions for payments made in connection with sexual harassment and abuse claims. As a nod to the “MeToo” movement and high profile sexual harassment claims recently in the national spotlight, the Act eliminates the deduction from taxable income of any settlement or payment related to sexual harassment or sexual abuse, including attorneys’ fees, if the settlement is subject to a nondisclosure agreement. The Act adds to Section 162 of the Internal Revenue Code subdivision (q) which states: (q) Payments related to sexual harassment and sexual 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.