Private-Company Sale Bonuses and Section 280G

Possibly, but a private C corporation is not automatically subject to the golden-parachute penalty. First test whether the company would qualify as a “small business corporation” under the special Section 280G definition immediately before the ownership change. That exemption does not require an actual S election. If it fails, a separate exemption may be available for a corporation whose stock is not readily tradable if properly disclosed payments receive the required shareholder approval. Only then should you apply the disqualified-individual, change-of-control, present-value and three-times-base-amount tests. The wrong answer can affect the corporation's deduction and the recipient's 20% Section 4999 excise tax.

This is a live closing decision for a founder, board or CFO approving executive bonuses, accelerated equity or severance in a material sale. AE can coordinate a paid compensation-and-return model with deal counsel before the bonus agreements, shareholder vote and funds flow are final.

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Why “we are a C corporation” does not settle the exemption

The final Treasury and IRS Section 280G regulations, Questions 5–7, exclude payments with respect to a corporation that would qualify as a small business corporation under Section 1361(b), with the statute's specified modification, immediately before the change in ownership or control. The IRS expressly says the corporation need not have made an S election. A privately held C corporation with eligible owners and an otherwise qualifying share structure may therefore have this exception; a private company with an ineligible ownership or stock structure may not. Entity status must be proved from the cap table, governing documents and relevant look-through rules, not inferred from the tax return's C-corporation label.

Even if that exception fails, a separate private-company route may exclude payments when the stock is not readily tradable and the specific payments satisfy the regulations' shareholder-approval requirements. The vote requires more than 75% of the eligible voting power, adequate disclosure of material facts to the eligible holders, and proper treatment of shares held by payment recipients. The sale vote and parachute-payment vote cannot simply be made conditional on one another. Counsel should control the waiver, disclosure, voting population and timing; a board resolution alone is not a substitute. Publicly traded stock and certain upstream traded ownership can alter this route.

If no exception applies, test the payments—not just the deal bonus

Section 280G concerns payments in the nature of compensation to a disqualified individual that are contingent on a qualifying ownership or control change. A closing bonus may be only one component. Acceleration of equity awards, severance, certain retention or consulting arrangements, and other benefits may need to be valued together. Determine each covered person's base amount from the applicable compensation history and compare the aggregate present value of relevant contingent payments with three times that base amount. The threshold is a cliff: reaching it can make the otherwise covered payments parachute payments, not merely the dollars above the three-times line. The IRS regulations, Questions 2–3 and 30–40, distinguish this threshold from the later computation of excess parachute payments.

If the test is met, Section 280G generally denies the payer a deduction for the excess parachute amount, while Section 4999 can impose a separate 20% excise tax on the recipient's excess amount. That does not make the full bonus nondeductible in every case. Documented reasonable compensation for qualifying past or future services can change the analysis under specific regulatory standards; it cannot be asserted after the fact simply because a manager will remain employed. Ordinary wage, withholding, employment-tax and state rules still apply even when a 280G exemption removes the special penalty.

A simplified pre-closing bonus model

Assume a corporation does not qualify for the small-business-corporation exception, has no valid private-company shareholder-approval exemption, and makes one $1.25 million closing-contingent cash payment to a disqualified executive. Assume the executive's properly computed base amount is $400,000, there are no other covered payments or reasonable-compensation adjustments, and the entire payment's present value is $1.25 million. Three times the base amount is $1.2 million, so the payment crosses the threshold. Under these deliberately narrow assumptions, the preliminary excess is $850,000 ($1.25 million less $400,000), not merely the $50,000 above the threshold. The preliminary Section 4999 excise-tax amount would be $170,000 (20% of $850,000), and the corporation's potential Section 280G deduction disallowance would concern the $850,000 excess. This is not a complete payroll or income-tax calculation.

Now change just one fact: if the corporation genuinely satisfies the small-business-corporation exception at the required moment, Section 280G's parachute-payment definition excludes this payment under the regulation. The bonus may still be taxable compensation and may face other deduction or withholding rules, but the special $170,000 excise-tax illustration no longer follows. The exemption test must come before selling a proposed “2.99-times” cutback as the only solution.

A decision path before the letter of intent and closing payroll

Verify the transaction. Map the legal change in ownership, control or substantial assets and the paying entities. Coordinate the answer with AE's stock-versus-asset sale structure guide.
Test company-level exclusions first. Reconcile S-eligibility facts even if Form 1120 was filed, then evaluate the distinct non-readily-tradable-stock shareholder-approval route with counsel. Preserve a dated cap table and signed corporate record.
Identify people and payments. Build one schedule per potentially disqualified individual showing transaction bonuses, vesting changes, severance, deferred compensation, retention terms and side agreements. Do not let payroll, legal and deal teams model different totals.
Compute, then negotiate. Calculate the regulatory base amount, present values, three-times threshold, excess payments and any supportable reasonable-compensation components. Model company deduction, recipient tax, any contractual gross-up or cutback, and after-tax sale proceeds.
Reconcile the returns. Match the approved payment terms and closing funds flow to Forms W-2, 941, corporate deduction workpapers and individual excise-tax reporting. AE's sell-side tax diligence guide covers the broader payroll and transaction file.

Documents and common failure points

Current and historic cap tables, stock classes, shareholder residency and entity ownership, formation documents, elections and any upstream traded-entity ownership.
Purchase agreement and closing schedule, employment and severance contracts, equity-award plans, bonus letters, retention and noncompete terms, payroll history and compensation valuations.
Recipient-by-recipient base-amount and payment-present-value workpapers, proposed waiver, full disclosure packet, shareholder-vote records, board approvals, and a tax/withholding schedule.

Common expensive errors: assuming every C corporation fails the small-business exception; assuming every private corporation automatically gets a shareholder-vote exemption; counting only the named deal bonus while omitting accelerated equity; mistaking the three-times threshold for the taxable excess; letting a payment recipient vote when the regulation excludes their shares; making the sale conditional on payment approval; and treating a reasonable-compensation label as proof. The company and recipient need one consistent schedule before signing and filing.

AE can review the tax computation and return implications with transaction counsel and the compensation team. The outcome may be a documented exemption, a defensible excess-payment estimate, or a negotiation over bonus design and price before the buyer fixes the deal economics.