Sexual Harassment Settlements With Nondisclosure Agreement Will Not Be Deductible Under New Tax Law

A provision in the Tax Cuts and Jobs Tax Act will increase the “after-tax cost” for companies to settle “sexual harassment” or “sexual abuse” claims if they wish to maintain a “nondisclosure agreement” of the details. The law will disallow a business deduction for the amounts paid to settle such claims (including attorneys’ fees) if the settlement contains a nondisclosure agreement. 

This provision addresses the use of nondisclosure agreement terms to possibly prevent public disclosure of sexual harassment allegations or reports.

The language of the new law is very simple. Its application to structuring settlements of claims will likely be complex. The tax law adds § 162(q) to the Internal Revenue Code as follows: