Parachute Payments

Parachute Payments describe a situation where there is a lump sum payment on a change of control of a business.  Many change of control documents have a provision that says if there is a Parachute Payment, the structure of a payout can change to minimize the tax consequences of the company and/or the individual.  First you look to a base period which is 5 years and come up with an annualized base income for the person receiving the payment and if the parachute payment is greater than three times the base amount then it is an considered an excess parachute payment.  An excess Parachute Payment is not deductible by the company.  The person receiving the Parachute Payment it is hit with an excise tax in the amount of 20% over and above their normal withholding.  There are several provisions in the IRS Code that discuss small businesses and small business stock, and in some cases also kick in on a change of assets and not just change of control.  Make sure you talk to your legal and tax expert to learn how a Parachute Payment may affect you in a change of control situation.