Section 280G Golden Parachute Tax: What Founders and Executives Need to Know Before Closing

Section 280G of the Internal Revenue Code was enacted to discourage large compensation payments triggered by corporate acquisitions. The theory was that "golden parachutes" — large payments to departing executives — were a corporate governance problem and should be discouraged through tax consequences. In practice, 280G applies to a much broader set of compensation arrangements than pure golden parachutes, and it regularly surfaces in lower middle market M&A transactions as an unexpected complication.

The statute is triggered when a "disqualified individual" — defined as an officer, 1% or more shareholder, or highly compensated employee — receives payments contingent on a change of control that, in total, equal or exceed three times the individual's "base amount" (their average annualized compensation over the five preceding taxable years). Payments above the 3x threshold are "excess parachute payments." The individual pays a 20% excise tax on top of ordinary income tax. The company loses its deduction for the excess amount.

How 280G is triggered: the three-times test

The mechanics of 280G are specific and require a detailed calculation for each potentially affected individual.

Dollar math example: An executive has a base amount of $400,000 (average W-2 over 5 years). Total change-of-control payments (transaction bonus + equity acceleration + severance) = $1,350,000. The 3x threshold = $1,200,000. Total payments of $1,350,000 exceed $1,200,000 — so 280G applies. The excess parachute payment = $1,350,000 minus $400,000 = $950,000. The executive owes 20% excise tax on $950,000 = $190,000 in excise tax on top of ordinary income taxes. The company loses the deduction for $950,000.

Who qualifies as a disqualified individual

The 280G rules apply to "disqualified individuals" — a defined term under the statute that is broader than most founders expect.

In a founder-owned lower middle market business, the founder is typically both an officer and a 1% or more shareholder — making them a disqualified individual under both prongs. If the founder has co-founders or a management team with equity and officer titles, each of those individuals is a separate 280G calculation.

The analysis must be conducted for each disqualified individual separately. The threshold calculation is individual-specific: a CFO with a $180,000 base amount has a 3x threshold of $540,000, while the founder with a $450,000 base amount has a $1,350,000 threshold. A transaction bonus of $500,000 triggers 280G for the CFO but not the founder.

The shareholder vote: the private company advantage

Private companies have one significant 280G advantage that public companies do not: the ability to conduct a shareholder vote to waive the 280G excise tax. Under Treasury Regulation 1.280G-1, the excess parachute payments are not subject to the 280G rules if shareholders who own more than 75% of the voting power approve the payments before they are made.

The shareholder vote process has specific requirements. The disclosure to shareholders must include: the identity of the disqualified individuals, the total amount of parachute payments, and the fact that the vote is being conducted to avoid the 280G rules. The vote must occur before the change of control. It cannot occur after closing.

Gross-up provisions and deal structure

In some transactions, the purchase agreement or employment agreement includes a "gross-up" provision — an obligation by the company or buyer to pay an additional amount sufficient to cover the excise tax. Gross-ups are common in large-company deals but unusual in lower middle market transactions.

A gross-up converts the executive's problem into the buyer's problem. For an executive facing $190,000 of excise tax on $950,000 of excess parachute payments, a gross-up at the 20% excise tax rate requires an additional $190,000 payment — which is itself subject to income tax, requiring a further gross-up. The math compounds: a full gross-up for a combined federal and state marginal rate of 50% and the 20% excise tax would require a gross-up factor of approximately 1.54x the initial excise tax, meaning a $290,000 gross-up payment to net $190,000 after taxes.

How to minimize 280G exposure through planning

The most effective 280G mitigation happens before the transaction — ideally 12–18 months before a sale process. The goal is to reduce the amount of compensation that is "contingent on a change of control" and therefore counted as a parachute payment.

Equity vesting structures can be modified so that vesting is not accelerated at change of control — instead, equity vests on a schedule that runs through an employment period post-close (double trigger). Under a double trigger, vesting accelerates only if the executive is also terminated without cause or resigns for good reason. Double-trigger structures reduce the COC-contingent amount in the 280G calculation because the acceleration is not certain at the time of the transaction.

Transaction bonuses that are paid for remaining employed through the close and continuing post-close (retention bonuses with a 12–24 month service requirement) are partially or fully excluded from the 280G calculation to the extent the service requirement is not waived at close.

FAQ: Section 280G golden parachute tax