Section 280G of the US Internal Revenue Code is a deal economics item, not a footnote. It can create a cash cost at closing, change management’s incentives in signing and go-shop periods, and trigger non-deductibility for the company while imposing a 20 percent excise tax on the individual. In competitive M&A, 280G exposure also affects how sponsors and bankers structure equity rollovers, retention packages, transaction bonuses, and even vesting mechanics for legacy awards.
“Golden parachute payments” in common deal language are broader than 280G. 280G is a specific tax regime that applies when a “disqualified individual” receives “parachute payments” contingent on a “change in ownership or control” and those payments exceed a statutory threshold. The cash impact can sit with the target, the buyer, the executives, or some combination depending on how the deal is papered. This article explains how 280G parachute payments work in practice, where the money moves at signing and closing, and how to underwrite and negotiate them.
280G is a corporate deduction disallowance rule paired with an executive-level excise tax. If 280G applies, the corporation loses a tax deduction for the “excess parachute payment.” Separately, the executive pays a 20 percent excise tax on that excess, in addition to ordinary income and employment taxes.
280G does not generally apply to private companies that qualify for the shareholder approval exception, and it does not apply to payments from a partnership if the payor is not a corporation. It also does not apply to ordinary-course compensation that is not contingent on a change in control, even if paid around closing. However, “contingent” is interpreted broadly and can capture acceleration, bonus triggers, and certain settlement payments tied to the transaction.
The practical result is that 280G is rarely a single line item called “parachute.” It is usually an aggregation exercise across employment agreements, severance plans, transaction bonus letters, equity plans, RSU and option award agreements, deferred compensation, non-compete payments, consulting arrangements, and gross-up provisions. Small drafting differences can move meaningful dollars in or out of the parachute base, which is why the issue routinely pops late if the deal team does not inventory documents early.
280G is codified in IRC Section 280G and the individual excise tax is in IRC Section 4999. The mechanics live in regulations and valuation practices, but your underwriting tends to come down to five defined concepts and one cliff effect.
The cliff effect drives behavior. If payments land just under three times base, 280G does not apply. If they are at or above three times base, the excise applies to the excess over base, and the company loses the deduction on that same excess. That all-or-nothing threshold explains why negotiations gravitate toward cutbacks, “best net” language, or a private-company vote.
280G exposure can create direct purchase price leakage when the target pays transaction bonuses or accelerated severance at closing. Even when documents describe the payments as “employer-paid,” cash leaves the business and reduces what the buyer effectively receives in a cash-free, debt-free framework. As a result, the payments can function like incremental consideration and change the equity bridge.
280G also creates tax leakage through deduction disallowance. In a leveraged buyout, lost deductions are not theoretical because they increase cash taxes and can reduce debt service headroom. The lost tax shield can matter most when layered on top of other deduction limits, which is why it belongs in your tax forecast and not as a vague diligence footnote.
280G can distort incentives at exactly the wrong time. If management expects excise tax exposure without a gross-up, they may push for higher deal proceeds, better rollover terms, or additional retention awards. If management expects a cutback, they may accept a lower immediate payout in exchange for post-close compensation, which changes alignment during diligence and integration planning.
280G shows up in the documents that drive dollars and timing, which is why you want a “drafting map” even if you are not drafting. The usual sources are employment and severance arrangements, transaction bonus letters, equity plan documents, and any deal-linked releases or non-competes. The point is not legal formality. The point is identifying what is contingent on closing and how it will be valued.
The flow-of-funds impact depends on when payments are made and who funds them. Target-funded payments at close reduce delivered cash and can change closing cash adjustments. Buyer-funded payments at close can look like incremental consideration and complicate the uses schedule. Post-close payroll spreads liquidity impact but does not avoid 280G if the payments remain contingent on the change in control.
In most deals, the cleanest economic treatment is to treat 280G-related payouts as transaction expenses borne by the seller, either by reducing equity proceeds or by explicitly deducting them in the closing statement. Whether you price the lost deductions is less consistent, but you should at least quantify them in the investment committee narrative so the team understands what is driving post-close cash taxes.
A single example explains why 280G parachute payments turn into late-night spreadsheet iterations. Assume an executive has a base amount of $1.0 million and aggregate parachute payments contingent on the transaction equal $3.2 million. Because $3.2 million is at least three times the base amount, 280G applies.
The excess parachute payment is generally $3.2 million minus $1.0 million, or $2.2 million. The executive owes a 20 percent excise tax on $2.2 million, or $0.44 million, plus ordinary income taxes. The corporation loses the deduction on that $2.2 million excess.
If the payments were reduced to $2.99 million, 280G would not apply at all. That cliff is why “cutback to 2.99x” features are common in agreements without gross-ups, and why the calculation often changes late as deal value, rollover mechanics, and award valuations drift between signing and closing.
Private companies can often avoid 280G through a shareholder approval process if conditions are met. In practice, it requires advance planning, clean cap table records, and careful disclosure, because the votes must be informed and certain shareholders are excluded. Disqualified individuals cannot vote their shares on the approval, which can make feasibility a real execution question in founder-heavy or rollover-heavy structures.
Buyers should not assume the exception is available unless the seller can show a clear path early. If the seller says it “plans to run a 280G vote” but has not built disclosure or validated voting mechanics, treat that as a timing risk and underwrite accordingly.
Gross-ups, where the company reimburses executives for excise taxes (sometimes including income taxes on the gross-up), are now less common in sponsor-backed deals but still exist in legacy contracts. From a buyer perspective, gross-ups are value leakage and a governance signal, and they can create circular cost because the gross-up itself may be a parachute payment.
The most common alternative is a cutback. One approach cuts payments to just below three times base to avoid 280G, restoring deductibility and eliminating excise tax, but reducing executive economics. A “best net after tax” approach compares the after-tax outcome of paying in full versus cutting back, and then pays the executive the higher net amount. That structure can be buyer-friendly when the excise exposure is small relative to the cutback required, and buyer-unfriendly when payments are far above the threshold.
Equity rollover and new equity grants can change 280G outcomes in ways that are not obvious in a standard sources-and-uses view. Rollover equity is often framed as an investment, not compensation, but preferential terms offered only because of the transaction can raise characterization and valuation questions. You do not need to solve the tax debate as a banker or investor, but you do need to flag where the economics depend on a fragile assumption.
Accelerated vesting of existing equity awards is the most common 280G driver in sponsor deals. Two issues dominate: valuation methodology and modification risk. The value of acceleration is often tied to deal consideration, and if consideration includes rollover equity or earnouts, the valuation can swing the three-times math. Similarly, if awards are modified in connection with the deal, even to “convert” or “assume” them, incremental value can be treated as contingent on the change in control.
Retention awards granted at signing or closing can also become parachute payments if they are substitutes for transaction consideration or conditioned on closing. Even when conditioned on post-close service and paid over time, the payment can still be captured if the change in control is the but-for cause, so the team needs consistent documentation and a reasonableness narrative.
280G becomes actionable when you force it into the same artifacts you already use to make decisions. In a live model, treat 280G as two separate lines: a cash item that affects closing proceeds and a tax item that affects post-close cash taxes. Then tell the story in the IC memo as an execution and alignment risk, not just “a tax issue.”
This is also a junior-friendly workflow. As soon as you see single-trigger acceleration plus a high headline valuation, you can assume 280G exposure until proven otherwise and request the document set early, alongside other M&A due diligence materials.
280G problems usually arise because the team discovers late that acceleration and transaction bonuses push one or more executives over the threshold. You reduce that risk by running a narrow, repeatable work plan before the LOI hardens and re-running it as value drifts.
When you negotiate, focus on levers that move economics without breaking retention. Adjusting acceleration mechanics from single-trigger to double-trigger can reduce parachute value, but it may affect retention and require governance approvals. Rebalancing dollars from a closing bonus into a post-close retention bonus can preserve motivation while reducing the chance you trip the cliff. Finally, do not let equity rollover mechanics drift without re-running 280G math, particularly if the team is also negotiating contingent consideration such as an earnout.
280G parachute payments matter because they move real money, change tax shields, and alter management incentives when you can least afford misalignment. Model the cash leakage and the lost deduction, identify covered individuals early, and treat mitigation as an execution plan with owners and timing. The goal is not to “solve tax.” The goal is to prevent a preventable closing scramble that weakens pricing discipline and distracts from integration.
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