Companies may choose to offer severance to an employee at the end of employment. But severance pay is no free throw! Typically, any severance payment should be conditioned on the employee’s execution of a waiver and release of claims.
In the past, a company could have deducted both the settlement and attorney’s fees related to such settlement or payment. However, in response to the #metoo movement, under the new Tax Cuts and Jobs Act, the deduction is not allowed if the settlement is “related to sexual harassment or sexual abuse” and “subject to a nondisclosure.”
“No deduction shall be allowed under this section 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 fees related to such a settlement or payment.”
This new provision has created several unknowns. Such as, when is a settlement or payment “related to sexual harassment or sexual abuse”? There are creative ways to respond to this new requirement. Don’t brick shot this one, contact your attorney for the assist!