In Episode 22 of How Tax Works, Matt Foreman discusses Golden Parachutes under section 280G, which may sound like a fun thing to have, but they likely result in the highest effective income tax rates.

Listen to the episode here:

  

Follow us on Bluesky: @howtaxworks.bsky.social

How Tax Works, hosted by FRB Partner Matthew E. Foreman, Esq., LL.M., delves into the intricacies of taxation, breaking down complex concepts for a clearer understanding of how tax laws impact your financial decisions. Through this, listeners are treated to a comprehensive breakdown of entity structures, from the robust shield of C corporations to the flexibility of partnerships and LLCs. Foreman navigates through the maze of tax considerations, shedding light on entity-level taxation, shareholder responsibilities, and nuanced tax strategies. Foreman shares valuable insights and practical advice, emphasizing the need for informed decision-making and consultation with tax professionals. From qualified small business stock to state and local tax considerations, no stone is left unturned in this illuminating exploration of tax law and entity selection.

Whether you’re a seasoned entrepreneur, accountant, lawyer, or financial advisor, “How Tax Works” offers a wealth of knowledge to empower you in making sound business decisions. Tune in and embark on a journey to unravel the complexities of tax law, one episode at a time.

This podcast may be considered attorney advertising. This podcast is not presented for purposes of legal advice or for providing a legal opinion. Before any of the presenting attorneys can provide legal advice to any person or entity, and before an attorney-client relationship is formed, that attorney must have a signed fee agreement with a client setting forth the firm’s scope of representation and the fees that will be charged.

Transcript:

**This transcript has been prepared automatically by AI and may contain inaccuracies**

Matthew Foreman [00:00:00]:
Welcome to the 22nd episode of How Tax Works. I’m Matt Foreman. In this episode, I’m going to talk about golden parachutes, which are taxed like they are lead balloons, which. Which, by the way, you can actually get a lead balloon to fly. Don’t recommend it. Good episode of Mythbusters, if you ever want to see it. Anyway, How Tax Works is meant for informational and entertainment purposes only.

Matthew Foreman [00:00:32]:
This may be attorney advertising, and it is absolutely not legal advice. Please hire your own attorney. How Tax Works is intended to help listeners navigate the intricacies and complexities of tax law, regulations, case law, and guidance to demystify how taxes shape the financial and business choices that we all make. Before we get started, a few administrative things. New episodes every two weeks. I don’t know what’s going to be the 23rd episode. I have not put that out. I’m a little bit ahead in these episodes and I just haven’t sketched it out yet.

Matthew Foreman [00:01:00]:
So I don’t know. So you’re just, you’re just going to be really excited and two weeks, you’re like, oh, man, this is best day ever. Don’t know what I’m going to listen to. Right. If you have any questions, comments, or constructive criticism, you can email me at my FRB email address, which you can find via your favorite search engine. I’m no longer going to discuss upcoming webinars and presentations on this because it just becomes pointless too quickly. So if you just go to the How Tax Work page on the FRB website, it’ll give you a list of whatever’s coming up in the next few months. All right, so let’s talk about golden parachutes.

Matthew Foreman [00:01:32]:
So what is a golden parachute and why does it exist so enacted in the early 80s? Basically, the executives at the Target court. Pause. I’m not actually talking about Target Corporation or Target Inc. Or whatever Target’s name actually is. Target means the company being acquired or someone wants to acquire. Just throw that out there. Anyway, so executives at the Target Corp. Had a huge deal.

Matthew Foreman [00:01:55]:
They had. They had these gigantic deal bonuses that were bad for shareholders, right? Because the buyer could just price it in. And all it did was it shifted money. Essentially, the buyer would pay the same price. They just lower it by the bonuses and the executives would get these bonuses instead of the shareholders. So Congress went, well, that doesn’t, you know, that doesn’t really make sense. It discouraged deals bad for shareholders. It’s going to entrench management.

Matthew Foreman [00:02:17]:
It’s going to give incentive for manager to behave like A bunch of jerks. So what they did, you know, they said, look, these incentives that have been created by these huge deal bonuses are bad for shareholders, good for management and executives. And they lowered the money that went to shareholders. So they passed 280 cap G. Right. It deals with golden parachutes, which I’ll define in a moment. Enacted in 1984. 1984.

Matthew Foreman [00:02:40]:
So we’re at 41 years. Right. Depending on when it was passed. Technical corrections in 86, 88 and 96. Treasury proposed regulations in a Q and a format in 89, which were finalized in 2003, just a shade under 14 years to finalize them. They are some of the easiest regulations to read and understand because they are in question and answer format. Highly recommend. If you have a question or you have an issue with this, just read through them.

Matthew Foreman [00:03:05]:
They’re actually pretty easy to do in some ways. I wish they did more in Q and A format, but to ADG is so specific, it’s so narrow that it’s kind of hard to do it otherwise. All right, so what does two ADG do? Right? Two things. One, the payor corporation, the company paying the golden parachute, loses the deduction for all excess parachute payments. Defined term, and I will define it later. The recipient, called a disqualified individual, pays a 20% excise tax of the amount of the excess parachute payment because it is an excise tax, not an income tax. No foreign tax credit, no state tax deduction. Can’t deduct it otherwise.

Matthew Foreman [00:03:44]:
So you’re getting an extra 20% tax to the recipient and the corporation cannot deduct it. This is straight up draconian. Okay? Nasty, right? This is a sledgehammer. This is an 18 wheeler. There’s. There are ways around it. But first, before I get around how to get around it, because there’s ways to do it, of course, I can talk about those at the end. Leave the good stuff for the end.

Matthew Foreman [00:04:05]:
What is a golden parachute? Have to define that. All right, so a golden parachute is the receipt of a payment or where one or more of the triggers for that payment. And there can be other triggers. Right. Is the sale of a company the change of ownership, change of control, things like that. Right. So the payment itself must be of a certain size relative the recipient’s income or, you know, specific group of people, things like that. Right.

Matthew Foreman [00:04:35]:
To whom does it apply? Right. It applies to officers, certain shareholders, and the highest compensated group of individuals. They can be employees or independent contractors. Some people say, oh, well, I’ll just be an independent contractor. Not an issue. Won’t work. There’s exceptions for certain contractors, right? You have to be undergoing a change in control transaction. And if you use an entity to provide services to the target Corp.

Matthew Foreman [00:05:02]:
Q&A, 16 of the regs say that, you know, two ADG applies as if the entity does not exist, right? So if your CEO has a corp to limit liability, I guess you can do that. I don’t know. I’m just kind of making this up on the fly. They ignore the corp, right? Just goes to you as an individual. 2 AEG applies only to C Corps, okay? It includes tax exempt entities which are often C Corps, but then they’re exempted from tax otherwise. It includes insurance companies, publicly traded partnerships and foreign companies. Taxes corps as corporations, right? It applies to consolidated groups and affiliated groups which I’ll discuss a little more detail, but I’ll kind of ignore them. And that’s important.

Matthew Foreman [00:05:43]:
I want to know a couple of things here. First off, you may notice one does not apply to S Corps. All right? So this is ostensibly a benefit to being an S Corp, but not really. It does not apply to partnerships and it does not apply to a C Corp that could be an S Corp but never made the election. Okay? And I’m going to broaden that even more. Okay? And I’ve done this, this one. I’ve dealt with a C corp that could be an S Corp except that one of the owners is a foreign individual that is also exempted from 280G. All right? So it’s really important.

Matthew Foreman [00:06:15]:
So let’s say you have a C Corp that has five shareholders, four U.S. and one is a foreign individual, right? Not a U.S. person. As long as that is an individual who owns. Other than the fact that they are not a US person. If they were a US person, the C Corp could be an S. Then you don’t have to deal with 280G. A lot of times in deal work you’ll see reps and warranties that really exist solely to deal with 280G because it’s so big and it hits the paying corporation which is either because of liability reasons post transaction, post purchase.

Matthew Foreman [00:06:54]:
So that’s really important. All right, what types of payments? So the key and what they’re looking for is excess, excuse me, excessive payments. Right? So what is an excessive payment? Right? It includes an acceleration of vesting equity severance payments, bonuses, early vesting of non qualified deferred compensation, continued payment on health or other fringe benefits or enhancement of other benefits. Right? So it is really, really, really broad. The way I describe it to clients is if one of the triggers for getting more stuff that makes you feel better is the fact that there is a change in control or ownership transaction, then you may have. Right. A payment that could be a golden parachute. All right, let’s get some music and be back in a minute.

Matthew Foreman [00:07:55]:
So we’re back. So when are these triggered? Right? Well, there has to be a change in ownership or effective control. You can have something that says if 2% of the company is sold, I get an extra hundred dollars. Guess what, Guess what? That is not going to do it. Unless more so it isn’t that it requires this large bonus, it’s that it’s triggered by that. So if it’s 2% or more but 78% is transferred, I’ll get into in a second, you know. Yeah, that that would qualify. Sometimes you’ll see stuff and there are certain exceptions that deal with it.

Matthew Foreman [00:08:27]:
Right. So is there a definition in 280G for a change in ownership or effective control? No. Hey, what. What about in the legislative history? Also no. So where are we going? We’re going to the regulations. So congratulations Congress, you’ve abdicated your authority and you said it to Treasury. Then Congress complains about treasury, you know, in the IRS issuing regulations. But what are we supposed to do here? Right.

Matthew Foreman [00:08:50]:
So there’s three types of changes. Two are very bright line. One’s pretty subjective. Changes are usually generally obvious. When I see them triggered most it’s when they’re selling, you know, 80% of the company and 20% gets rollover or they’re just selling 80% of the company. You know, something like that. Again, this only is C Corp. So kind of hard to do stuff with a C Corp.

Matthew Foreman [00:09:11]:
So really important, right. Sometimes it’s a taxable merger. Sometimes there’s other stuff like that. Right. A reorg can have 60% boot. So pretty big, right? So change in ownership one a person or persons acting as a group acquires stock again to C Corp. So has to be stock together with the stock already owned, right. And now they own more than 50% of the total fair market value or the total voting power.

Matthew Foreman [00:09:35]:
So that’s an either of the stock of the target corporation. You can do it via redemption. Right. So let’s say you own 20% and a whole bunch of shareholders get redeemed. Now you’re up to 74% making up a number. Congratulations. That could trigger it too. The regulations on acting as a group are usually very obvious and they apply to 318A attribution rules.

Matthew Foreman [00:09:59]:
If you’ve ever dealt with 318A attribution. You know why I’m not going to go into detail here. If you’ve never dealt with 3:18a, give it a read. You know, definitely not when you’re tired because you’re not going to want to deal with it. But you know, basically related persons, people who also own partnerships, et cetera, et cetera, et cetera, own corpse under certain percentages. It just constructive ownership can be very big. So even if you have people who are not really doing stuff together if they happen to own or they’re related, otherwise a lot of, a lot of familial ownership can trigger, can trigger the golden parachute rules. 2 Change in effective control, not control.

Matthew Foreman [00:10:38]:
Effective control. Right. One or two events that happens. So you presume a change in effective control. Okay, so the presumption’s there. A person or a deemed group acquires during a 12 month period 20% of the voting power of a corporation, excuse me, of the corporate stock, not value, just the voting power or the other event is the majority of the board of directors is replaced within a 12 month period by directors who are not endorsed by the majority of the exiting board. All right, There’s a PLR about having multiple proxy fights. They changed a lot of the board over in a 12 month period.

Matthew Foreman [00:11:16]:
That’s not a change in effective control because they’re totally separate. Again, it’s a presumption for these. It doesn’t have to be. You need facts to be really strong. You know, proxy fights are kind of their own animal. So you know, that’s something that Hussain got out of it. I would not want to have to get a PLR to get out of these. Right.

Matthew Foreman [00:11:34]:
Other exceptions include widely held public corporations, just harder to do that and parties that represent that they had no implied shareholder agreements to control the management of the acquired entity. So basically parties that could be brought together because probably 318 rules or otherwise there’s a significant change and they say no, no, we just both really like this company, we bought a huge amount of it, we’re not working together, et cetera, et cetera. Also, and I, you know, I said this with the last one, but if the prior board of director says oh no, no, we’re fine with this, you know, we’re all retiring, we’re moving to Acapulco, whatever, that’s cool, that’s fine. So that will also not trigger it as a change in effective control. The last one is going to be a change in the ownership of substantial portion of the Corporation’s assets. You know, look, a person or a deemed group again acquires during a 12 month period a substantial portion of the corporation’s assets where the asset gross fair market value, not net gross fair market value is at least a third of the total fair market value of the corporation’s assets. So this is like a sales subsidiary. That’s really what we’re looking for.

Matthew Foreman [00:12:43]:
So you know what people say, oh, we’ll just form a corp above, we’ll sell the subsidiary. We didn’t sell the corporate stock. We sold, you know, assets. Because it’s a corporation. No, it doesn’t work. Okay, you know, do an F Re or with the C corp at the top. Nope, doesn’t work. So, you know, there’s exceptions.

Matthew Foreman [00:12:59]:
If you’re redeeming one of the shareholders of corporate assets, if you transfer assets to a corporation, there’s at least 50% or more or more owned by the same corp or the transfer as a sub. So you know, look, they’re looking for ones where parents and subsidiaries are transferring assets between them. May not be, you know, a wholly owned subsidiary. It might be a, you know, affiliated group, but not consolidated or may just be like a small, you know, not a huge own, but like 50% or something. That’s the exception they’re looking for. Corporate reorgs are trying to get away from rather than actual transfers of assets otherwise. And what is acting as a group, Right? I’ve talked about this a few times. So acting as a group is not.

Matthew Foreman [00:13:40]:
If corporation A owns some of corporation B shares and both have ownership changes, it is a facts and circumstances test, which is generally not helpful. You know, so really what you’re looking for is people and they’re acting together. You’ve heard, I’ve talked about it, right? Oh, the parties represent, they didn’t do it or there was a proxy fight or just randomly two people like start buying up, right? And they happen to be brothers, Right. They’re not acting together, they’re not going to work together on it, but they just both think this is the best one of all time, right? The Dodge brothers owning a bunch of Ford. Whatever it is. There are also rules. If there’s a bankruptcy, I won’t be discussing them because I just think it’s totally outside of what we’re trying to do here. We’re going to take a quick break, get some music in and I’ll be back to take this bad boy home.

Matthew Foreman [00:14:32]:
So let’s get into it. We’ve identified it. Like I said, most are pretty obvious. But the question is who gets taxed? Right? So the person who gets taxed, individual who gets taxed, it’s going to be individual. Is a disqualified individual. 280G. 280CAP G SUB C. And that is anyone who is an employee, contractor or other person who performs personal services for the corporation.

Matthew Foreman [00:14:55]:
Right. The other person who performs personal services for the corp. That is defined in the regs. It’s really not. But you know, just think about it. It’s really intended to capture anyone who gets that bonus for any reason or perform services, you know, but they’re really looking at employees and contractors who are like employees. The second one is an officer, shareholder or high compensated individual. And you can really ignore the first part, the employee contractor.

Matthew Foreman [00:15:26]:
You know, I always say, look, focus on title role compensation, whether they own parts of the company, you know, things like that. You look at the 12 month period ending on the change in control date, right? So if you work for someone and you get a deal bonus, but you haven’t worked for them for five years or three years or whatever, don’t worry about it. Not an issue. You have to have been compensated for services provided within 12 months of the deal date. Could you delay a deal because of this? Absolutely. Should you, I don’t know, talk to your lawyer? Right? Maybe a bad idea. So let’s talk about it. What is an officer? Facts and circumstances Test titles.

Matthew Foreman [00:16:04]:
If someone’s an officer creates a rebuttable presumption. Look at the authority, look at what they can actually do. Administrative executive who is in regular and continued service. This is a lot like a responsible person for, for tax liability reasons. You know, a lot of that’s the same thing and a lot of it’s, you know, really the same idea. What they’re trying to capture are people who are running it, running the show, right? The boss. They’re in a person with a fancy title but has no real control. Probably not, but it’s a rebuttable presumption.

Matthew Foreman [00:16:36]:
Right? There is a maximum number of officers. I have seen companies where every single person, like 60 people had an officer type name. It was the goofiest thing ever. Everyone was an executive vice president. Okay? Everyone. I’m sorry. There are some senior vice presidents too. It’s the dumbest thing I’ve ever seen.

Matthew Foreman [00:16:54]:
So it’s not everyone. It is the lesser of 50 or the greater of 3 or 10% of the employees rounded up. Okay? So it’s the lesser of 50. So it cannot, you really can’t be higher than 50 or the greater number of 3 or 10% of employees. If you have 30,000 employees, 10% of employees, 30,000, 3,000. So it’s the greater of 3 or 3,000 and then it’s the lesser of 50 or 3,000. Right. So basically this says is the number can’t be less than three unless there’s only like one employee.

Matthew Foreman [00:17:29]:
Right. If there’s one employee, well that’s all you got. So really the number is cannot be lower than three, but a lot of times it’s up to the 50 mark. So it depends. How many employees do you have? There are rules around employees and how much they’ve had worked and who qualifies as an employee, things like that. You know, these are really just a number of people you have to do the computations for. It’s not that bad. It’s really not.

Matthew Foreman [00:17:53]:
You know, unless you’re doing public company work and you have thousands and thousands and you’re doing the full 50, you know, see how that goes. Right. Who is a shareholder? Right. Not every shareholder. You own stock of at least 1% of the fair market value. Again, constructive ownership rules for owner for ownership apply under 318A. Someone once asked me why this is 318A and not 7. Oh, I think it’s 707 that has the partnership ones.

Matthew Foreman [00:18:15]:
And the answer is because this is a C Corp. It may be 280G, may not be in sub C, but only deals with C Corps. So it should use the corporate ones as well because that makes sense. But people say, haha, I’m going to get around this. I’m going to have an option to own. Option to acquire stock. Nope, you own it. What about an option to acquire, an option to buy a stock? Nope, you own it.

Matthew Foreman [00:18:32]:
Don’t get cute. It’s a good piece of advice for tax structuring generally in here. And what about a safe? Right. Simple agreement for future equity. These bad boys are going to pop up all over the place. Had a discussion today as to whether a safe is equity or debt for certain non tax purposes. I don’t know. I’m not going to pretend to know the answer to that.

Matthew Foreman [00:18:52]:
But I don’t think safes are because I don’t think you actually own anything. We’ll see. You know, maybe someone will do it. Right. So what is a highly compensated individual? First you have to determine, you know, who goes into this. Right. So you have to figure out who are the employees. Right.

Matthew Foreman [00:19:08]:
And so it’s all employees except those who work less than 17 and a half. Hours a week or six or fewer months during the year. Right. So if you have someone who works three months a year, summer person, just kick them out. Doesn’t matter if they make a trillion dollars. Heck of a summer job for making that kind of money. We should hang out, but we’ll see how that goes. And then, you know, if you only work 10 hours a week, you know the retired executive who’s really highly compensated but only works minor, they’re less worried about that.

Matthew Foreman [00:19:33]:
Right. But you know who is a highly competent individual, Right? There’s a maximum number. Okay. If you have more than 24,900 employees, your highly competent individuals is your 250 highest compensated individuals. If you have 24,900 or fewer employees under the thing, you know, so getting rid of like the part time employees, then it’s 1% of that number rounded up. So if you have exactly 20,000 employees, it’s 1%. So that’s 240. Right? 24,000 employees.

Matthew Foreman [00:20:02]:
240. 20,000 employees. 200. I think I messed up the math, but corrected myself. You let me know it’s fine. Second, the income must be above a threshold. The amount for 20, 24. I didn’t check this because I actually initially started sketching this out last year and hadn’t.

Matthew Foreman [00:20:18]:
Didn’t really finish it. 414Q1, Cat B Romanet 1. 155,000 is the number. If everyone in your company makes $100,000, congratulations, you have no highly compensated individuals. You might still have officers, but no highly compensated individuals. Again, employees are contractors. And this excludes, this is really important, excludes contractors who receive compensation services in connection with the actual change of control transaction itself. So lawyers, bankers, accountants, we’re out.

Matthew Foreman [00:20:48]:
We’re not, we’re not highly compensated individuals. Could still be officers for other reasons, could have other issues. Not our issue there. Right. Payments contingent on a change in control. So what is a parachute payment? First off, don’t use money as a parachute. Not a great material for it. Going to recommend against that.

Matthew Foreman [00:21:07]:
Right. Nice. What is it, like a nylon or something? Something strong and light dollars, kind of heavy. All right, so a parachute payment is a payment that is contingent on a change in effective control or ownership and the aggregate present value of the payment or payments are at least three times your base amount. I will explain it. All right, so I’m going to. First off, I’m going to talk about, I’m just going to say change in effective control. I’m not going to talk about ownership.

Matthew Foreman [00:21:36]:
They’re kind of the same, it’s hard to shift ownership, not change effective control, especially given the thresholds. But anyway, a payment is contingent on a change in effective control. If the payment would not have been made, if no change of control or ownership incurred, if it accelerates the payment by vesting on the change of control, right? So even if the payment isn’t made, but it accelerates it, that qualifies, that’ll kick you in. And if it can be closely associated with the change of control. So because of a tender offer, because of a significant change in stock price, sometimes, you know, it has to be around an actual transaction or perceived transaction kind of. You still need the actual change in effective control or ownership. It can include a fire, you know, if a person’s fired as a result, the termination payment can be, you know, that or change in roles, responsibilities as a result of the transaction. That can be a golden parachute trigger.

Matthew Foreman [00:22:31]:
Trigger the parachute payment rules. So really, it’s anytime that the payment is changed or accelerated or whatever, that that’s what you’re looking for. All right? So you have to compute the amount of the parachute payment. So the parachute payment includes cash, property, stock options, RSUs, RSAs, everything like that. The most common parachute payment that I deal with, there’s cash bonuses. There’s also a lot of times when people have phantom stock, right? They, they look, if I ever sold my company, you’re going to get 6% of the proceeds. Congratulations, we have a golden parachute. That’s a parachute payment.

Matthew Foreman [00:23:07]:
Absolutely is going to. Well, not absolutely, almost certainly is going to trigger it. So that’s problematic. Let’s, you know, work through the math, right? A parachute payment does not include payments to or from retirement plans, 401k pension, yada, yada, yada. So that’s something you cannot worry about. So if, if you know, as a result of a bonus, you also get, you know, more money kicked into a 401k or a pension. The pension or 401k contributions are not included. A parachute payment also does not include reasonable compensation for services rendered.

Matthew Foreman [00:23:38]:
You need to show clear and convincing evidence and there’s more to it and dealing with it, but that’s enough, right? So, you know, the most common one is that if you have someone who, as a result of a change of control transaction was the, you know, CFOs get them all the time, right? They’re the one bearing the brunt of providing all the data, et cetera, et cetera, and they get the bonus for doing it. Actually, that may be reasonable compensation for services Rendered, So it’s not even. It doesn’t even run afoul of the golden parachute rules. But the amount must be reasonable, right? This is like an S Corp reasonable comp type thing. So it depends. You know, I wouldn’t be a lawyer if I didn’t throw one in per episode. So I think that’s really important. So let’s get to the really good stuff.

Matthew Foreman [00:24:22]:
The golden parachute math. Right. It’s algebra. The steps are, I think, fairly straightforward. Maybe I’m wrong. First, you figure out which payments are contingent on the change in control or ownership. Effective control or ownership. And you compute the base amount.

Matthew Foreman [00:24:37]:
I’ll define that in a second. Next, you can compute the contingent payments and you’re really only looking at the present value of those payments. So you’ll have ones where, okay, well, you’re getting, you know, for the next four years, you’re going to get $300,000 a year. Well, the first year, $300,000. Next year, time value, money back, $290,000. Next year, 280. I’m making up numbers. You have to agree on the interest rate, etc.

Matthew Foreman [00:25:02]:
Etc. But that’s really important. Then you compare the contingent payment amount with three times the base amount, which is called the threshold test. If the present value of the contingent payments equal or exceed equal or exceeding three times the base amount, you compute the excess parachute payment amount. Right. Which I’ll get to in a moment, the base amount. So you take your prior five years of income prior to the year with the change in control. Okay, so prior.

Matthew Foreman [00:25:34]:
So if you’re selling in 2025, make this real easy. Right? You’re going to do your average salary in 2020 through 2024, five years. Any income in gross income also includes other things, you know, because it’s gross income, not net. So a lot of things that aren’t necessarily taxable. So a lot of times you’re going to end up including certain fringe benefits that aren’t taxed. You’re going to include things like health care, et cetera, et cetera. Kind of annoying, but whatever you do it, it also explicitly says you have to put everything in US Dollars, I guess. Right.

Matthew Foreman [00:26:08]:
And. And one thing I always point out to people is you have to use the exchange rates for each year. So if they’re paid in euro for three years, you have to exchange that each year at that year’s exchange rate. That’s really important. Okay. And that’s it. So if you pay in the future current. Right, the threshold test.

Matthew Foreman [00:26:25]:
Right. So again, you’re going to do it. So what ends up happening? And this is really, really, really, really, really important, right? So you’re going to have the excess parachute payment, right? So the excess parachute payments actually the bonus minus your, your base amount. So if your bonus can be 30 million, your base amount is $100. Your bonus, you know, the excess amount is $29,999,900. Right. So that’s the idea. Pretty aggressive.

Matthew Foreman [00:26:53]:
Again, 20% exercise tax. And, and just, just, just for fun, the company does not get to deduct the payment. Right? That’s section 4999A and two 80 cap G. So taxes galore. Tax, tax, tax, tax, tax, tax, tax. Maybe, maybe not. There are two ways to get rid of the. I should say avoid V tax is under 4999A and to 80G.

Matthew Foreman [00:27:24]:
Right. One is what’s called a hard cutback. And so what you do is in the agreement and you can agree later that your bonus is going to be $1 less than three times the base amount. So if your base amount is a million dollars a year, your bonus can be no more than $2,999,999. Right. So you’ve then pass or fail, depending on how you look at it, the threshold test. And by passing or failing the threshold test, you don’t have an excess parachute payment. No excess parachute payment, Not a golden parachute.

Matthew Foreman [00:28:03]:
No taxes imposed. No. No extra deduction. So you can do it. A lot of people don’t want to do that. Right. And the reason is because if you were to take the individual and you impose a 20% tax, right. Let’s say that bonus was supposed to be $10 million, dropping it from 10 to 3.

Matthew Foreman [00:28:19]:
The extra, you know, 20% tax is really not that much. Two million bucks. You still net end up with more. Right. So what ends up happening mechanically? And this is, this is the dance of dance. It’s of dances. It’s kind of dumb, but it happens. And it’s absolutely something that I do is what you have to do is get the employee to agree to give up the payment, right? Total thing.

Matthew Foreman [00:28:47]:
And then the shareholders approved. No, no, no, no. We understand that you are willing to give it up for the benefit of the company. So we’re going to allow you to have it. You need a shareholder approval. I think it’s 2/3 or 3/4. I didn’t look it up. It’s not simple majority, right? Gotta have that order.

Matthew Foreman [00:29:05]:
It seems too simple, but it works with public Companies, you’re never gonna get that because generally speaking, you know, you’re never going to get that type of agreement with parties that don’t talk and hang out. But you are going to get that type of transaction and that type of agreement if you are a closely held company, right? The person getting the bonus as a cfo, they’ve worked there for eight years, the agreement has to be approved by the four shareholders who are their current bosses who want them to get it. And so you just get approval. It sounds like the dumbest thing. Maybe it is. You know, I’ve never, I mean, I say it’s stupid, but you sort of have to do this dance, right? You have to do this dance where you tell companies that or you tell an employee that they have to sign to do it, right? And they’re like, well, can I get a guarantee in writing that the company will pay? And you have to say no, they actually can’t do that because if they give you this, this in writing, prior to it, prior to the payment and prior to these signings that you actually run a file of 2, 80G and you have to pay the tax. So you have to do a trust fall with people who may hopefully trust each other and may not really trust each other. So it’s sort of a bit of a dance anyway, so on that lovely note, I think we fit more than enough of my time.

Matthew Foreman [00:30:32]:
And so that was the 22nd episode of How Tax Works. I hope you enjoyed it, Hope you learned something. I’ll be back in two weeks with the 23rd episode and I have no idea what I’m going to talk about, but it’ll be in April. It’ll be roughly at the end of tax season part one. I believe there’s now 74 parts of tax season, so hopefully you’ll enjoy it. Maybe go on a nice vacation. Shortly after, catch up on how tax works as some as you should. And we’ll do that.

Matthew Foreman [00:30:58]:
So now for the best song of all time. Have a nice day.