Deducting Attorneys’ Fees Under the Tax Cuts and Jobs Act of 2017 – Update

Client Alert
Tax Law

The Tax Cuts and Jobs Act of 2017 prohibits tax deductions for settlement payments and attorney’s fees related to sexual harassment settlement agreements when the agreement contains a confidentiality provision.

In my previous blog on the subject, I indicated that, although some commentators raised concerns that the deductions of both employers and employees were at risk, the provision likely only penalizes employers who insist on confidentiality provisions.

Now, the Internal Revenue Service (IRS) has confirmed in newly-issued frequently asked questions that only employer deductions are affected. The Service said:

  1. Does section 162(q) preclude me from deducting my attorney’s fees related to the settlement of my sexual harassment claim if the settlement is subject to a nondisclosure agreement?
  2. No, recipients of settlements or payments related to sexual harassment or sexual abuse, whose settlement or payment is subject to a nondisclosure agreement, are not precluded by section 162(q) from deducting attorney’s fees related to the settlement or payment, if otherwise deductible. 

Employers concerned about the deductibility of settlement payments should review the blog referenced above and consult IRS Publication 525  and their tax advisors for more information.