How to Calculate Section 280G Golden Parachute Penalties for Startups

 

A four-panel educational comic about calculating Section 280G golden parachute penalties for startups. Panel 1 shows a founder being warned about 280G taxes during a company sale. Panel 2 explains that payments over 3x the base amount trigger a 20% tax, with an advisor recommending keeping the buyout package below the limit. Panel 3 demonstrates a sample penalty calculation: base amount = $180K, payment = $600K, excess = $60K, penalty = $12K. Panel 4 offers strategies to avoid pitfalls: delay vesting, seek shareholder approval, and model M&A scenarios early.

How to Calculate Section 280G Golden Parachute Penalties for Startups

Startups gearing up for an exit—whether through acquisition or IPO—often face a hidden threat in the tax code:

Section 280G of the Internal Revenue Code, commonly known as the “golden parachute” rule.

If not properly handled, this rule can impose heavy excise taxes on both the company and its top executives.

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What Is Section 280G?

Section 280G applies when a company undergoes a change in control (e.g., acquisition), and makes large payments to executives deemed “golden parachutes.”

If these payments exceed a certain threshold, the IRS disallows the deduction and imposes a 20% excise tax on the executive.

It can surprise founders, CFOs, and VPs with unexpected tax bills at the worst time—during exit events.

Who Is Affected?

280G applies to “disqualified individuals,” including:

✔️ Officers (C-suite or high-compensated leaders)

✔️ Shareholders with over 1% ownership

✔️ Certain board members or related parties

Payments subject to scrutiny include bonuses, severance, accelerated equity vesting, and certain consulting agreements.

Understanding the Safe Harbor Rule

The golden parachute threshold is 3 times the individual's “base amount”—their average W-2 income over the past five years.

If total change-in-control compensation exceeds this threshold, the entire excess amount is non-deductible, and the executive pays a 20% excise tax.

The goal is to keep payouts under 3x the base amount to avoid penalties.

How to Calculate Penalties

Step 1: Calculate the base amount = Average annual compensation (past 5 years)

Step 2: Add up parachute payments: severance, vesting, bonuses, perks

Step 3: If total > 3x base amount, the excess is subject to 20% excise tax

Example: Base = $200,000 → Safe harbor = $600,000 → Payment = $800,000 → Excess = $200,000 → Tax = $40,000

Mitigation Strategies for Startups

πŸ›‘️ Structure payments to fall under the 3x threshold (e.g., delay vesting)

πŸ›‘️ Use shareholder ratification (small business exemption in some cases)

πŸ›‘️ Implement 280G calculations early in M&A diligence

πŸ›‘️ Model different payout scenarios with your legal and tax advisors

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Keywords: Section 280G, golden parachute tax, startup M&A, executive excise penalty, safe harbor calculation