What is an excess parachute payment?

Very generally, it is the portion of parachute payments exceeding three times the base amount, subject to IRC definitions and exclusions.

Can companies deduct golden parachute payments?

Excess parachute payments may be nondeductible to the corporation—deal models account for this alongside individual excise taxes.

How is base amount calculated?

Often based on a five-year lookback of compensation—confirm with tax counsel and payroll history.

Are ISO gains part of parachute calculations?

Treatment depends on facts and definitions; M&A counsel aggregates compensation items identified in diligence.

Is there a calculator?

Yes—use the 280G golden parachute calculator for threshold and excise estimates.

Golden Parachute & IRC §280G: Tax Guide for M&A Compensation

Q: Who pays the 20% excise tax?

Typically the disqualified individual on excess parachute amounts under IRC §4999, subject to detailed rules.

Key Takeaways

Excess parachute payment = parachute payments − (3 × base amount), subject to detailed definitions

20% excise tax generally applies to the individual on the excess portion

Corporations may lose deductions for excess parachute payments—impacting deal economics

Base amount is typically a 5-year lookback of compensation—verify with tax counsel

Private companies may use shareholder approval procedures where available

Executive Summary

Quick Answer

What is a parachute payment under §280G?

Source: IRC §280G definitions

Quick Answer

Who pays the 20% excise tax?

Source: IRC §4999

Quick Answer

Can the excise tax be avoided?

Source: Transaction planning

Golden parachute rules exist because Congress wanted to limit tax-favored windfalls in corporate takeovers. For employees, the issue is not just headline severance—it is whether accelerated vesting, lump sums, and transaction bonuses stack into parachute treatment.

Pair with our M&A equity guide and the 280G calculator.

IRC Section 280G infographic: excess parachute payments versus three times base amount and conceptual twenty percent excise on excess — **Figure 1:** Core mechanical idea—statutory definitions and exclusions still apply.

Core Concepts (Mechanics-Level, Not Advice)

Term	Plain-language hook
Disqualified individual	Officers, shareholders, and highly-compensated roles meeting statutory tests
Base amount	Generally average annual compensation over a 5-year lookback (details matter)
Parachute payment	Payments contingent on change in ownership/control, with exclusions
Excess	Amount above 3× base (if threshold tests are met)

Why This Shows Up in Tech M&A

Single-trigger acceleration can create large ordinary income events—see vesting acceleration.
Retention bonuses may be layered on top of equity acceleration.
Buyers model 280G exposure early because deductibility and employee excise affect net cost.

Disqualified individuals and change of control context for golden parachute tax rules — **Figure 2:** Who gets modeled in diligence depends on facts and tests—not job title alone.

Mitigation Playbook (Overview)

Strategy	Idea
Cutback	Reduce payments to stay below excess thresholds
Shareholder vote	Certain private company procedures may help—counsel required
Recharacterize / defer	May be possible in some structures—highly constrained
Insurance / gross-up	Sometimes negotiated for executives—taxable to employee

Mitigation strategies diagram for Section 280G: cutback, shareholder vote, and restructuring concepts — **Figure 3:** Common planning themes—confirm what your transaction permits.

Coordination With Other Rules

409A still matters for deferred comp—see 409A guide.
ISO/NSO treatment on assumption/substitution—ISO vs NSO.

Checklist

Identify all contingent payments in the CIC definition
Model base amount with payroll history
Compare to 3× threshold and estimate excise
Review equity acceleration as part of parachute math

Disclaimer

Educational only. §280G is complex and fact-specific. Consult M&A tax counsel before signing.

Primary sources

Source	URL
IRC §280G	https://www.law.cornell.edu/uscode/text/26/280G
IRC §4999	https://www.law.cornell.edu/uscode/text/26/4999