Code § 162(q), new under the Tax Cuts and Jobs Act, provides that:
(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.
The IRS has released some much needed guidance on interpreting Code § 162(q). It is now clear that the attorneys’ fees of the victim remain deductible, regardless of whether there is a non-disclosure agreement as part of the settlement.
IRS guidance is still needed on whether 162(q) applies to a settlement with a non-disclosure agreement that settles multiple claims of employment discrimination or other employment-law claims, only one of which is related to sexual harassment or sexual abuse, and whether “related to” denies a deduction for the entire settlement, or whether the attorneys’ fees, and lack of deduction, is apportioned.
It is also unclear whether the IRS will consider payments made pursuant to a confidential agreement that does not settle sexual harassment claims but which contains a broad waiver of claims, including for sexual harassment, as “related to sexual harassment” and thus, preclude the deduction for attorneys’ fees.
2 Employment Discrimination Law and Litigation § 18.15.50
January 2019 update to Human Resources Guide § 5:57.70