Implications of the Tax Reform Act of 2017 on Sexual Harassment in the Workplace

Abstract

The Tax Reform Act of 2017 has a limiting provision that disallows a Corporation from expensing costs related to the settlement of a sexual harassment or sexual abuse matter. If a nondisclosure agreement (NDA) is executed between the parties, the Corporation loses the right to deduct the settlement for income tax purposes. This provision has significant economic implications. The Corporation must decide if preventing the party from publicly discussing the matter and settlement is worth the cost of losing the deduction. The scientific approach to address this decision is two pronged. On one hand, such a choice can be analyzed in a capital budgeting or cost-benefit methodology and should be structured as a SWOT matrix. On the other hand, the decision relates to a binary choice of using or not executing a NDA. This decision can be modeled using a dichotomous decision function, such as, logit, probit, or a tobit model. This paper presents a historical review of laws covering sexual harassment in the workplace and how corporations should address the NDA decision.