Section 280G Golden Parachute Tax: The Private Company Exit Trap

You've spent years building a business worth $15M. Your CFO, COO, and two key VP-level managers hold unvested equity that accelerates at close. Your M&A attorney drafts employment agreements with change-in-control severance. The investment banker gets the deal across the finish line. Then — a few weeks before closing — a tax attorney runs a §280G analysis and tells you there's a $900,000 problem no one modeled. This happens constantly in middle-market deals, and it's almost entirely preventable if you understand Section 280G before you sign an LOI.

What Section 280G is

IRC § 280G — enacted in 1984, unchanged by TCJA and OBBBA — imposes two penalties on "excess parachute payments" made to "disqualified individuals" in connection with a change in control (CIC) of a corporation:¹

1. The corporation loses its deduction for the excess parachute payment (§ 280G). At a 21% corporate rate, each $1M of excess parachute payments that loses deductibility costs the business $210,000 in extra tax.
2. The individual pays a 20% excise tax (§ 4999) on top of ordinary income or capital gains tax. The excise tax is non-deductible, does not reduce the income tax owed, and stacks on top of whatever marginal rate applies.

Neither penalty is modest. On $2M of excess parachute payments, the combined deal cost is typically $400,000–$820,000 depending on the individual's tax bracket, entity structure, and state. And the tax arises automatically — there is no "oops, we didn't know" exception.

Who is a disqualified individual?

Section 280G applies to payments made to "disqualified individuals" of the acquired corporation. Under § 280G(c) and Treas. Reg. § 1.280G-1, Q&A-15, a disqualified individual is any individual who is:²

• An officer of the corporation at any time during the 12-month period ending on the CIC date. Only the highest-paid officers count, capped at the greater of 3 officers or 10% of total employee headcount (never more than 50 officers total).
• A shareholder who owns more than 1% of the fair market value of any class of stock at any point during the 12-month lookback.
• A highly compensated individual — any individual in the top 1% of compensation from the corporation, or if not top-1%, then who earned more than $130,450 in 2026 (the §414(q) threshold, adjusted annually).

In a typical $10M–$50M private company sale, this catches the CEO, CFO, any VP-level officer with significant salary, founders who own equity, and key managers who hold even a small number of profit interest units. It's broader than most sellers expect.

The base amount: your five-year average compensation

The 280G calculation begins with the "base amount" for each disqualified individual — the average annual compensation includible in gross income for the five taxable years immediately preceding the year the CIC occurs.¹

The base amount includes W-2 wages, bonuses, and any other compensation that was includible in gross income during those years. It excludes employer contributions to qualified retirement plans (401k, cash balance plan) that were not included in the individual's W-2 income. If an individual has been employed for fewer than five full years, use the shorter period of actual employment.

The 3× threshold and the excess calculation

The regime does not trigger unless total parachute payments to a disqualified individual equal or exceed 3× the base amount. Below that threshold, there is no problem at all.¹

A "parachute payment" is any payment that:

• Is in the nature of compensation,
• Is made to a disqualified individual,
• Is contingent on a change in ownership or effective control of the corporation, and
• Has an aggregate present value ≥ 3× the base amount.

Common CIC-contingent payments that get swept in: accelerated equity vesting (RSAs, profits interests, options), severance pay tied to CIC, deferred compensation triggered by CIC, signing bonuses paid at close, and retention payments conditional on the deal completing.

Once the 3× threshold is breached, the excess parachute payment is calculated as: total parachute payments − 1× base amount. The excise tax applies to this excess. The employer's deduction is disallowed on the same excess.

Notice that the 3× threshold is only the trigger. Once triggered, the excess is calculated from 1× base amount, not 3×. The first $400K (1× base) is never considered excess — but everything above it in this case is. This math surprises most sellers because the "penalty zone" is much larger than it looks from the outside.

The private company escape hatch: the shareholder vote

Here is the provision that makes §280G manageable for most private company sellers: if no stock in the corporation is readily tradeable on an established securities market, parachute payments are exempt from §280G if the payments are approved by a vote of shareholders owning more than 75% of the voting power of outstanding stock — after adequate disclosure of all material facts about the payments.³

This is the §280G(b)(5) exception. It is specifically designed for private companies. A properly executed shareholder vote — with full disclosure — completely eliminates §280G and §4999 exposure for all covered payments, regardless of the size of those payments.

What "adequate disclosure" means

The IRS regulations (Treas. Reg. § 1.280G-1, Q&A-7) require that before the vote, shareholders receive disclosure of:

• All potential parachute payments, including their aggregate present value
• The identity of each disqualified individual covered
• A description of the material terms of each payment
• The potential tax consequences to the individuals (the excise tax) and to the corporation (loss of deduction)

The disclosure does not need to be in any specific format, but it must be substantively complete. Inadequate disclosure invalidates the vote. Most M&A attorneys prepare a two-to-five page disclosure memorandum that goes to all shareholders simultaneously, followed by the vote.

How the vote is conducted

The vote can be conducted by written consent (in states that allow it) or at a shareholder meeting. In most private company deals, written consent is used — shareholders receive the disclosure, sign a written approval, and the vote concludes without a formal meeting. The timeline for completing the vote is flexible, but it must occur before the payments are made.

When the vote requires a supermajority you don't have

The 75% threshold is based on voting power, not economic interest. If your cap table includes founders with super-voting shares, preferred investors with separate vote rights, or ESOP shares with pass-through voting, the 75% calculation can get complicated.

In deals where founders hold most of the voting power, the threshold is easy to clear — founders are approving payments largely to themselves and their management team. In deals with significant outside investors holding meaningful vote blocks, you may need to negotiate shareholder approval as part of the pre-close checklist, and dissenting investors may use the vote as leverage on other deal terms.

If you cannot clear the 75% threshold, the shareholder vote exception is unavailable, and you are left with the other mitigation strategies described below.

Strategy 1: The 299% cutback

If the shareholder vote is unavailable or impractical, the most common alternative is the cutback to 299%: structuring or reducing CIC-contingent payments so that total parachute payments to each disqualified individual remain below 3× their base amount.

Below the 3× threshold, there is no excess parachute payment, no excise tax, and no deduction loss. In the worked example above, reducing total payments from $1.5M to $1.199M (just below 3× $400K = $1.2M) eliminates all §280G exposure — saving $451,000 in combined tax cost.

The cutback is typically implemented by:

• Reducing accelerated equity vesting. Instead of full acceleration at close, parties agree to partial acceleration — say, 12 months of additional vesting — reducing the CIC-contingent present value of the equity payment.
• Re-characterizing severance. Severance that is not contingent on a CIC (e.g., an existing contract that provides 12 months' severance regardless of CIC) may be carved out of the parachute payment calculation as "reasonable compensation." See the reasonable compensation analysis below.
• Extending vesting post-close. Equity that vests only if the individual remains employed post-close for 12+ months is generally not a parachute payment, because the vesting contingency is employment — not the CIC itself.

The 299% cutback does leave money on the table for management. Buyers typically accept this because they are not changing the purchase price — they are adjusting the form of compensation. However, the management team may want the lost value replaced through post-close bonuses, higher salaries, or equity in the acquiring entity. These post-close payments, because they are not contingent on the CIC, are outside §280G.

Strategy 2: The reasonable compensation carve-out

Not every CIC-contingent payment is automatically a parachute payment. Under §280G(b)(4), the amount of any parachute payment is reduced by the portion that represents "reasonable compensation for personal services to be rendered on or after the date of the change in ownership or effective control."⁴

In practice, this means:

• A consulting agreement requiring 24 months of post-close services at market-rate compensation is at least partially a payment for future services, not a CIC payment. A professional valuation of those services supports the reasonable-compensation exclusion.
• A post-close employment agreement with a below-market severance trigger is compensating the individual for risk of early termination — not solely rewarding them for the CIC.
• Signing bonuses paid at close for identifiable future obligations (e.g., staying 6 months through integration) have some reasonable-compensation character.

The IRS and Treasury regulations require that the reasonable-compensation component be supported by a reasoned valuation. This is not a self-certification; a compensation specialist or valuation firm typically prepares a written analysis that the parties can rely on if the deduction is later challenged. The cost of the analysis ($5,000–$20,000) is trivial compared to the tax at stake.

Gross-up provisions: who pays the excise tax?

When sellers cannot fully eliminate §280G exposure, the next question is whether the company or buyer will provide a "gross-up" — additional cash to cover the individual's 20% excise tax liability so they are made whole on a net-of-tax basis.

A true gross-up is expensive. Because the gross-up payment itself is also taxable income to the individual (and may itself constitute a parachute payment), the math compounds: covering a $220,000 excise tax at a 45% combined marginal rate requires a gross-up of roughly $400,000 — and that additional $400,000 may then increase the excess parachute calculation further.

The more common outcome in private M&A today is the "modified cutback" or "best-net" provision: the parties compare (a) paying all the CIC-contingent compensation and incurring the excise tax, vs. (b) reducing payments to 299% of base amount and avoiding the excise tax. The individual receives whichever scenario leaves them with more after-tax cash — and the difference is settled at close.

Full gross-up provisions still appear in large public company acquisitions and in some founder-controlled private deals where the buyer offers them as a sweetener. In competitive M&A processes, buyers increasingly refuse to provide gross-ups because the cost is real and the benefit accrues to management, not to the buyer's equity. Negotiating a gross-up requires leverage — typically only available when a specific individual is irreplaceable post-close.

280G and ESOP exits

An ESOP exit is treated like any other change in control for §280G purposes. However, ESOP transactions typically involve S-corporation shareholders and smaller management teams, and the §280G(b)(5) shareholder vote exception is often viable because the ESOP trustee (representing the employee benefit plan) plus any remaining owner shareholders together often constitute more than 75% of the voting power. Model this explicitly — don't assume it works without running the numbers. See our ESOP Exit Strategy guide for the broader tax mechanics.

280G in private equity rollover deals

In PE-backed deals where the founder and management roll a portion of equity into the new entity (NewCo), the rollover equity proceeds are generally not parachute payments — they represent continued ownership in the successor company, not a CIC-contingent payment. However, the accelerated vesting on the existing equity (the portion that is cashed out at close) can still constitute a parachute payment on the cashed-out value.

The interaction between rollover equity, continuing employment, and accelerated vesting is one of the most complex areas of §280G analysis in middle-market deals. When a founder's management team rolls 20–40% of their equity, the "contingent on CIC" analysis for their remaining cashed-out equity is fact-specific and requires a 280G specialist. See our PE Rollover Equity guide for rollover mechanics generally.

When to do the 280G analysis

The answer most deals give is "at signing." The correct answer is "before LOI."

Once an LOI is signed and exclusivity begins, the seller's negotiating leverage drops sharply. A buyer who discovers a $500,000 §280G problem during due diligence may:

• Demand a purchase price reduction equal to the lost deduction value
• Require the seller to fund an escrow against the company's lost deduction
• Require management to accept the 299% cutback, reducing their CIC payments below what they expected
• Use the complication as leverage to renegotiate other deal terms

A pre-LOI §280G analysis costs $5,000–$15,000 depending on complexity and firm. It gives you complete visibility into which individuals are affected, what the total penalty exposure is, whether the shareholder vote exception is available, and how large the 299% cutback would need to be. That information should be in your hands before you invite a buyer to propose structure — not discovered during a 30-day exclusivity window.

What a financial advisor does here

A §280G analysis is normally performed by an M&A tax attorney or a compensation specialist working alongside one. The financial advisor's role is:

1. Flagging the exposure early. M&A attorneys sometimes address §280G only when management's equity and severance stack exceeds an obvious threshold. An exit-planning financial advisor who understands the full compensation picture — equity grants, unvested plans, deferred comp, phantom equity — can identify §280G risk a year or more before a deal, when there is time to restructure rather than cut back.
2. Modeling the net-of-tax impact on management. The cutback vs. gross-up decision requires modeling each individual's after-tax outcome across multiple scenarios. That's the financial planner's job — not the attorney's.
3. Coordinating with estate and post-sale planning. If the §280G analysis changes the structure of management payments (e.g., a portion shifts to post-close salary vs. CIC consideration), the financial plan for the management team changes too. Post-sale portfolio construction, Roth conversion windows, estimated tax planning — all get updated based on the 280G outcome.
4. Structuring phantom equity and profits interests. Pre-deal management compensation design — including whether to use RSAs, options, phantom equity, or profits interests — directly affects §280G exposure. These decisions are made years before a sale; getting them right is an exit-planning function, not a deal-closing function.

Key questions to ask before you go to market

• Who on the management team holds unvested equity, deferred compensation, or CIC severance provisions?
• What is each individual's five-year average W-2 compensation (base amount)?
• What is the present value of all CIC-contingent payments to each disqualified individual?
• Does any individual exceed 3× their base amount? By how much?
• Is the company private, with no publicly traded stock? (If yes, the shareholder vote exception is available.)
• Do you have the shareholder votes to clear 75%? Do you need investor consent?
• Is management willing to accept a 299% cutback, and how would the cut be structured?