Internal Revenue Code Section 280G: What You Need to Know

What is Section 280G?

Section 280G of the Internal Revenue Code (IRC) disallows a deduction for "golden parachute" payments made to disqualified individuals.

Who is a Disqualified Individual?

A disqualified individual is an employee who:

• Owns more than 1% of the corporation's stock
• Is a highly compensated employee
• Receives a payment that is contingent on a change in ownership or control of the corporation

What is a Golden Parachute Payment?

A golden parachute payment is any payment made to a disqualified individual that is:

• In excess of three times the individual's base salary
• Made within one year of a change in ownership or control of the corporation
• Not connected to the performance of the individual

Effect of Section 280G

The effect of Section 280G is to disallow a deduction for golden parachute payments. This means that the corporation cannot deduct these payments from its taxable income. Additionally, the disqualified individual must pay a 20% excise tax on the payment.

Exceptions to Section 280G

There are a few exceptions to Section 280G. For example, the disallowance of a deduction does not apply to:

• Payments made to a disqualified individual who is involuntarily terminated
• Payments made to a disqualified individual who is over the age of 65
• Payments made to a disqualified individual who is disabled