A lesser-known amendment buried in the newly revised federal tax code related to tax deductions for businesses could very well have devastating, unintended consequences on victims of workplace sexual harassment and abuse. Specifically, §162(q), while originally intended to end a business's ability to deduct sexual misconduct settlements conditioned on non-disclosure agreements (NDAs), states, in its present form, that “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 non-disclosure agreement, or (2) attorneys' fees related to such a settlement or payment.”

What this provision means

While §162 generally addresses tax deductions which a business may or may not take, many experts have interpreted §162(q) to apply to both businesses and individual taxpayers based on its use of the modifier “under this chapter.” Based upon this reading, victims of workplace sexual misconduct who settle their claims subject to an NDA would be prohibited from deducting the portion of their settlement allocated to attorney fees, but would have to pay taxes on the entire amount of their recovery, and not just the net amount they would ultimately receive.

Consequently, victims of workplace sexual misconduct would be worse off than their counterparts who were victims of other forms of invidious discrimination, such as race, age or disability, who can generally deduct settlement portions attributed to attorney fees. As a result of this uncertainty, Sen. Robert Menendez, D-N.J., who is credited with first introducing the idea that businesses should not be allowed to take deductions for sexual harassment settlements conditioned on NDAs, has announced plans to introduce legislation clarifying that §162(q) is meant to apply only to businesses.

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