Are you a shareholder or employee of a C-Corporation? Is this business in the process of being sold? If so, the cash compensation you receive as part of this sale could result in significant tax costs. Without proper planning, excessive compensation also known as golden parachute payments can have serious tax consequences to you and your business.
The tax on golden parachute payments is a tax Congress levies on excessive compensation from a corporate merger or takeover. The recipient of the compensation is subject to a 20% excise tax on the golden parachute payment, in addition to Federal and State income taxes, and the corporation is denied a deduction for the compensation payments.
Who does the tax apply to?
Both public and private C-corporations are subject to the golden parachute rules. Only payments to disqualified individuals are treated as golden parachute payments and are subject to the excise tax. Disqualified individuals must both be an employee or independent contractor and either a shareholder, officer, or highly compensated individual.
What is a Golden Parachute Payment?
A golden parachute payment is any compensation guaranteed to an individual in the event of a merger or takeover of a corporation. This includes cash payouts, the present value of accelerated stock options and grants, certain employee benefits, etc.
Calculating the tax
The golden parachute excise tax is levied on the amount of the golden parachute payments in excess of the disqualified person’s average wages over the last five years, also known as the base amount. However, if total golden parachute payments are less than three times the base amount, then the excise tax does not apply.
Calculating whether compensation is subject to the golden parachute excise tax is both complex and important. Please contact your L&B professional at (858) 558-9200 to help determine if the golden parachute tax applies and if there are any planning opportunities available.