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
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