The Law at Work: Secret Sexual Harassment Settlements and Taxes
In his the Law at Work column in the San Diego Union-Tribune, Shareholder Dan Eaton discusses one of the less noticed features of the federal tax overhaul enacted late last year – a provision eliminating the deductibility of sexual harassment settlement payments and related attorney’s fees if the parties agree to keep the settlement secret.
The new federal tax provision adds an exception to section 162 of the tax code which allows a business to deduct “all the ordinary and necessary expenses paid or incurred” in operating the business. New subsection 162(q) bars any deduction “under this chapter” for “any settlement or payment related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement” and for attorney’s fees related to such a settlement or payment. This means, according to experts, that the recipient of such a secret settlement payment now must pay taxes on the full settlement – including the amount she turns over to her attorney – rather than excluding or deducting the amount paid in fees from her taxable income. That also means the fees paid to the accuser’s attorney will be taxed twice, once as income to the accuser and again as income to her attorney.
This tax reform was the unexpected first legislative move to discourage secret sexual harassment payoffs. According to Dan, it won’t be the last.
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