What is a parachute payment under Section 280G?

It is generally a compensation payment to a covered individual that is contingent on a change in ownership or control and exceeds three times the individual’s base amount, subject to detailed statutory calculations and exceptions.

What is the 20% excise tax?

IRC Section 4999 imposes a 20% excise tax on excess parachute payments received by the individual, separate from ordinary income tax.

Does Section 280G apply to all employees?

No. It targets disqualified individuals such as officers, certain shareholders, and highly compensated individuals—determined using statutory tests and facts.

Can the company deduct golden parachute payments?

Section 280G generally disallows (or limits) a corporate deduction for excess parachute payments, which is why deal parties negotiate cutbacks or restructurings.

Do accelerated RSUs count toward 280G?

Payments tied to a change in control—including certain accelerated equity—may be tested as parachute payments depending on plan design and facts. Legal and tax advisors run the calculation.

Is reasonable post-change salary exempt?

Certain amounts can be excluded as reasonable compensation for services after the change, but the rules are narrow and fact-specific.

Section 280G: Golden Parachute Tax Rules for Executives (Explained)

Key Takeaways

Applies to corporate acquisitions, mergers, and similar transactions—not ordinary salary

Only certain officers, shareholders, and highly compensated individuals are covered

Base amount is generally a five-year lookback of average includible compensation

Excess parachute payments trigger lost corporate deduction and 20% excise on the executive

Cutback provisions and gross-up clauses are contractual—tax outcomes vary

Executive Summary

Quick Answer

What is Section 280G in simple terms?

It is a federal tax regime that targets large severance and change-in-control payments to certain executives and highly paid individuals. If payments contingent on a corporate change exceed three times a defined base amount, the excess is treated as an excess parachute payment. The company generally loses a deduction for that excess, and the executive pays a 20% excise tax on it under Section 4999—unless an exemption applies.

Source: IRC Sections 280G and 4999

If you are negotiating accelerated vesting, cash severance, or single-trigger payouts around an acquisition, 280G can turn a generous package into a deduction problem for the company and an excise tax for you. This guide explains the rules; modeling belongs with your tax advisor.

The bottom line: Read 280G before you sign a CIC agreement. For broader executive equity strategy, see Equity Compensation for Executives and Stock Options in M&A.

What Triggers 280G?

280G applies when there is a corporate change of control (merger, acquisition, hostile takeover, etc.) and payments (cash or property) to a disqualified individual that are contingent on the change.¹

Not every payment counts—routine salary unrelated to the transaction usually does not. Equity acceleration and stay bonuses tied to the deal often do.

Who Is a Disqualified Individual?

Generally:²

Officers of the corporation (facts-and-tests apply),
Shareholders owning more than 1% of stock,
Highly compensated individuals among the highest-paid group.

Your HR/legal team makes the factual determination using statute and regulations.

The Three-Times-Base-Amount Test

Base amount: Roughly the individual’s average annual compensation from the corporation includible over the five tax years ending before the change date (with specific exclusions).³

Parachute payment: Payments contingent on the change that exceed three times the base amount trigger excess parachute payment treatment on the portion above one times the base amount (detailed statutory math applies—your CPA computes exact numbers).

Intuition: Congress wanted to limit golden handshakes that look like windfalls relative to historical pay.

Corporate Deduction vs Executive Excise

Code section	Effect
§280G	Denies (or limits) the corporation’s deduction for excess parachute payments
§4999	Imposes a 20% excise tax on the recipient on excess parachute payments

Both can apply—this is not an either/or.

Common Planning Angles (High Level)

Strategy	Note
Cutback	Reduce payments below threshold—contractual
Gross-up	Company pays your excise tax—expensive; not always offered
Reallocation	Shift value to non-parachute components—legal precision required
QSBS / equity mix	Character of consideration matters—coordinate with counsel

Private companies and certain S corporations may have limited 280G applicability in specific cases—do not assume you are exempt; verify.

Relationship to Equity Compensation

Double-trigger RSUs and accelerated options may accelerate value into the change window—280G analysis often runs parallel to securities law and contract review.
ISO/NSO characterization affects ordinary vs capital treatment later but 280G focuses on payment contingency, not option tax flavor.

Footnotes

Disclaimer: 280G/4999 analysis is highly factual. This article is educational and not legal or tax advice. Engage counsel and a CPA for any transaction.

IRC §280G(b)(2) defines parachute payments; exceptions exist for reasonable compensation post-change. ↩
See IRC §280G(c) for disqualified individual definitions and shareholder tests. ↩
Base amount rules in IRC §280G(b)(3); precise calculations use statutory worksheets. ↩