Frequently Asked Questions
What is 280G?
280G refers to the section of the Internal Revenue Code that applies in the event of a corporation which undergoes a change in ownership or control. The law specifically disallows a deduction to the corporation for payments it makes to disqualified individuals if such payments constitute excess parachute payments. Further, Internal Revenue Code section 4999 applies an individual 20% excise tax on the excess parachute payments received by the disqualified individual.
Who is a 280G Disqualified Individual?
Generally, a disqualified individual is anyone who, with respect to the corporation undergoing a change in ownership or control, is considered either: an officer of the corporation, a 1% shareholder of the corporation who also performs services to the corporation, or is among the highest 1% paid individuals of the corporation. The determination is based on a review of these individuals during the 12 months prior to the change in ownership or control.
How is 280G Calculated?
While there is complexity in determining the value of the so-called parachute payments, 280G is calculated by comparing the parachute value of payments to the disqualified individual's historical taxable compensation. More specifically, if the parachute value of payments equals or exceeds 3-times a disqualified individual's average taxable compensation for the 5 years preceding the year of the change in ownership or control, then the amount of the parachute payments in excess of 1-times the disqualified individual's average taxable compensation for the 5 years preceding the year of the change in ownership or control are considered excess parachute payments.