Employer's Legal Resource Blog

The Tax Man Cometh – The New Tax Cut and Jobs Act Creates More Questions and Provides Few Answers for Employers

2.16.2018

If an employer finds itself in the unenviable position of being a defendant in a demand letter or complaint, often the decision is made to try and resolve the matter. The new tax act will have a significant impact on that decision. Specifically, IRS code section 162(q)  provides:

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.

In the past, an employer had been able to deduct ordinary and necessary expenses incurred in running the business. Generally, this would have included all manner of legal settlements and legal fees. Now, if the settlement agreement has a confidentiality provision, which is “normally” of significant importance to the employer and sometimes the employee, the government will no longer permit the above referenced deductions.  However, the new language creates many unanswered questions.

Q: If a claim is made that does not involve sexual harassment or sexual abuse but, as is normally the case, and the release includes language broad enough to include all claims including sexual harassment, would a payment made under this scenario be deductible?
Q: Is the provision only intended to apply to the settlement payments and attorneys’ fees or does it apply to other costs incurred in the course of the litigation or a settlement, for example COBRA payments?
Q: The prohibition is very general, therefore are employees/plaintiffs prohibited from deducting the attorneys’ fees paid by the employer/defendant?

TAKEAWAY: Currently, the answers are unknown.  However, such issues must be considered when any employer is making the decision to enter into a settlement agreement with an employee.

BLOG DISCLAIMER

The postings on this blog were created for general informational purposes only and do not constitute legal advice or a solicitation to provide legal services.  Although we attempt to ensure that the postings are complete, accurate, and up to date, we assume no responsibility for their completeness, accuracy, or timeliness.  The information in this blog is not intended to create, and receipt of it does not constitute, a lawyer-client relationship.  Readers should not act upon this information without seeking professional legal counsel.

This blog may contain links to independent third party websites and services, including social media. We provide these links for your convenience, and you access them at your own risk.  We have no control over and do not monitor the content or policies (including privacy policies) of these third-party websites and have no responsibility for, and no liability with respect to, their content, accuracy, or reliability.  Unless expressly stated, we do not endorse any of the linked websites or any product, service, or publication referenced herein or therein.  We will remove a link to any site from this blog upon request of the linked entity.

We grant permission to readers to link to this blog so long as this blog is not misrepresented. This site is not sponsored or associated with any other site unless so identified.

If you wish for Wilentz, Goldman & Spitzer, P.A., to consider representing you, please obtain contact information from the Contact Us area of this blog or go to the firm’s website at www.wilentz.com.  One of our lawyers will be happy to discuss the possibility of representation with you. However, the authors of Wilentz blogs are licensed only in New Jersey and/or New York and do not wish to represent anyone who viewed this site in a state where the site fails to comply with all laws and ethical rules of that state.

PRIVACY POLICY