What is 280G and when does it matter?

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Short answer: Section 280G of the Internal Revenue Code imposes a 20% excise tax on the executive and denies the company a deduction when 'parachute payments' triggered by a change-of-control exceed three times the executive's average compensation. It applies to executives of corporations being acquired. The 20% excise tax is on top of ordinary income tax, so total tax can exceed 60%. Most relevant for C-suite and other top officers; rarely matters for non-executive roles. Best-of-both clauses (pay full amount or cut back to safe harbor, whichever leaves more after tax) protect the executive.

The 280G basics

Section 280G of the Internal Revenue Code creates significant tax consequences when an executive's parachute payments tied to a change-of-control exceed a defined threshold:

The executive pays a 20% excise tax on the portion exceeding the threshold (on top of ordinary income tax)
The company loses the tax deduction for the excess payments
The threshold: parachute payments must exceed three times the executive's "base amount" (defined as average annual compensation in the 5 years before the CoC)

This creates a tax cliff. Once parachute payments exceed three times base amount, the 20% excise tax applies to everything above one times base amount, not just the excess above the threshold.

What counts as a parachute payment

Parachute payments include any compensation contingent on a change of control:

Cash severance triggered by CoC
Equity acceleration triggered by CoC (single-trigger or double-trigger)
Bonus payments tied to CoC
Continuation of benefits post-CoC
Consulting arrangements that look like disguised severance

For executives with significant unvested equity that fully vests on CoC, the parachute amount can be very large. The math typically makes 280G relevant for C-suite executives in M&A scenarios.

Who 280G applies to

Section 280G applies to "disqualified individuals" of a corporation, which generally means:

Officers of the corporation
Shareholders owning more than 1% of corporate stock
"Highly compensated" individuals (top 250 or 1% of employees, depending on company size)

For most companies, this means the C-suite and a few other senior executives. Non-officer employees, even at high comp levels, are typically not disqualified individuals.

The provision applies to acquisitions of regular C-corporations. S-corporations are not subject to 280G. LLCs and partnerships are not subject to 280G but have their own complex rules for similar transactions.

The cliff problem

The 280G threshold creates a tax cliff. If parachute payments are just below three times base amount, no excise tax. If just above, the 20% excise tax applies to a large amount.

Example: Executive with $500K base amount.

Parachute payments of $1.49M (2.98x): No 280G excise tax
Parachute payments of $1.51M (3.02x): 20% excise tax on $1.01M = $202K in excise tax

The marginal $20K increase in parachute payments triggers $202K in excise tax. The cliff effect means small structural changes can have huge tax consequences.

Best-of-both clauses

To protect executives from the cliff, many employment agreements include a "best-of-both" provision:

"If any payment to Employee would constitute a 'parachute payment' under Section 280G, then Company will: (i) reduce the parachute payment to the maximum amount that does not trigger the 280G excise tax, OR (ii) pay the full amount and allow the excise tax to apply, whichever leaves Employee with the greater after-tax amount."

This works because sometimes the full amount minus the excise tax is still more than the cut-back amount; other times the cut-back is more. The clause lets the calculation be done at the time of CoC.

A best-of-both clause is standard for senior leader employment agreements and should be requested if missing.

Alternative protections

Beyond best-of-both:

Gross-up clauses: Company pays the executive enough additional comp to cover the 280G excise tax. Less common now due to investor scrutiny but still used for some executives.

Reasonable comp exception: Compensation for services actually rendered after the CoC is not parachute payment. Structured carefully, executive can receive post-CoC compensation that doesn't count toward the parachute calculation.

280G safe harbor for private companies: With shareholder approval (75% of shares), private companies can effectively elect out of 280G for specific payments. Requires careful planning before the CoC.

Acquisition timing: Sometimes acquisitions are structured to manage 280G implications. Less of an employee-side negotiation but relevant in M&A planning.

When 280G actually matters

For most employees, 280G is irrelevant:

Non-executive roles: rarely subject to 280G
Cash-comp-heavy roles: parachute amounts often don't reach the threshold
LLCs or S-corps: 280G doesn't apply
Companies not being acquired: 280G isn't triggered

280G matters specifically for:

C-suite of corporations facing acquisition
Executives with large unvested equity that fully vests on CoC
Executives with single-trigger acceleration in M&A deals
Senior leaders of late-stage private companies likely to be acquired

If you're in this group, 280G is a real consideration in offer and severance negotiations. Specialized counsel is typically involved.

What to do next

If you're a senior executive evaluating an offer at a corporation likely to face acquisition, 280G planning is part of the analysis. We deliver an offer review in 24 hours for $199, with referrals to specialized 280G counsel where complexity warrants. See Offer Review.

For situations already in active M&A diligence, this calls for specialized counsel rather than a general offer review.

Sources

IRC § 280G
Treas. Reg. § 1.280G-1
IRC § 4999 (the excise tax provision)
Standard executive employment agreement templates

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Last updated: Sun May 31 2026 00:00:00 GMT+0000 (Coordinated Universal Time)

Counteroffer is a contract analysis service, not a law firm. This page is informational, not legal advice.