The IRS has issued final regulations that provide taxpayers and tax professionals with guidance on how to report and pay the excise tax owed on corporate stock repurchases.
Background
Congress created a new tax code section as part of the Inflation Reduction Act of 2022. Section 4501 imposes a one percent excise tax on stock repurchases by certain corporations beginning after December 31, 2022. Earlier this year, the IRS issued proposed regulations that would provide new guidance related to the tax.
Those regulations were made final on June 28, 2024, and scheduled for publication in the Federal Register on July 3, 2024.
Corporate Buybacks
A stock buyback is precisely what it sounds like a company repurchases shares from its shareholders directly or from the open market.
There are many reasons why companies might be interested in a buyback. One is corporate consolidation—since stock shares represent ownership of the company, the more shares that are spread about, the less control shareholders might have over the company’s future. Buybacks can help keep control of the company in the hands of a few. Stock buybacks can also help preserve or boost stock prices. And, since selling stock is generally viewed as a way to raise much-needed capital, buying it back can signal to investors that the company is financially healthy (even if it’s not).
There’s also a tax twist. Those earnings are typically taxed at ordinary income tax rates when companies issue dividends. However, a corporate buyback is effectively a sale, and the difference between the sales price and purchase price of shares sold is subject to tax-advantageous capital gains rates.
(Savvy investors may even be able to repurchase shares at a lower price later.)
Congress dialed back the tax advantage with the passage of section 4501. The new code section imposes a new excise tax on some company buybacks, but it’s at the corporate level—not the shareholder level. There’s no such tax at the corporate level for dividends (they’re taxed as profits before distribution to shareholders), lessening the tax advantages for buybacks.
The Joint Committee on Taxation estimates that the excise tax will raise $74 billion over ten years. (President Biden’s budget called for an increase in the excise tax rate from one to four percent. The Penn-Wharton Budget Model estimates that the increased tax would raise $265 billion over the 10-year budget window.)
New Law
Under the new law, stock buybacks are subject to a 1% excise tax. A number of rules and exceptions apply, including:
- The tax applies to public companies.
- The tax applies to repurchases after December 31, 2022.
- The tax does not apply to buybacks of less than $1 million or if the buybacks are contributed to an employee pension or similar plan.
- Any new issues to the public or stock issued to employees would reduce the amount subject to tax.
- The tax will not apply if the repurchases are treated as dividends or as purchases by a dealer in securities in the ordinary course of business.
- Real estate investment trusts (REITs) and regulated investment companies (RICs) are exempt from the tax.
- The tax is not deductible.
Proposed Regulations
The proposed regulations would impact publicly traded domestic corporations that repurchase their stock or whose stock is acquired by certain affiliates. The regulations also would impact certain publicly traded foreign corporations that repurchase their stock or whose stock is acquired by certain affiliates.
The proposed regulations would implement a statutory netting rule that reduces the aggregate fair market value (FMV) of stock repurchased by a taxpayer during a tax year by the aggregate FMV of stock issued by the taxpayer during the tax year. Additionally, the regulations would implement the statutory de minimis exception which provides that a taxpayer is not subject to the stock repurchase excise tax with respect to a tax year if the aggregate FMV of the stock repurchased by the taxpayer during the tax year does not exceed $1,000,000.
Final Regulations
The final regulations, effective June 28, 2024, largely mirror the proposed regulations. For example, the final regulations confirm that the stock repurchase excise tax be reported on Form 720, Quarterly Federal Excise Tax Return, due for the first full calendar quarter after the end of the corporation’s taxable year.
You must also attach Form 7208, Excise Tax on Repurchase of Corporate Stock. This new form is used to figure the amount of stock repurchase excise tax owed. You can see the draft form here.
The form is two pages long. You can get a sense of what it looks like here:
You can see the full version of the draft here. You can find the draft instructions here.
(The IRS reminds taxpayers that drafts of forms are for your information. You should not file or rely on draft forms, instructions, and pubs for filing.)
Forms 720 and 7208 are due for taxable years ending after December 31, 2022, and on or before June 30, 2024. They must be filed by the third quarter due date for Form 720, which is October 31, 2024.
If a corporation has more than one taxable year ending after December 31, 2022, and on or before June 30, 2024, the corporation should file Form 720 with two separate Forms 7208 (one for each taxable year) attached by October 31, 2024.
However, the final regulations do differ in some ways from the proposed regulations, including:
- So long as a covered corporation qualifies as a RIC or a REIT for a taxable year, then all of such corporation’s repurchases of its stock during that year would qualify for the statutory exception under section 4501(e)(5). Accordingly, the final regulations exempt RICs and REITs from the obligation to file a stock repurchase excise tax return. (However, RICs and REITs would continue to be subject to the recordkeeping requirement in §58.6001-1 under the final regulations.)
- The IRS intended a stock repurchase excise tax return to be filed only with respect to a taxable year in which a repurchase, or a transaction treated as a repurchase, is made. Accordingly, the final regulations clarify that a stock repurchase excise tax return must be filed concerning any taxable year in which the covered corporation or person treated as a covered corporation makes a repurchase or is treated as making a repurchase.
- The final regulations affect publicly traded domestic corporations that repurchase their stock or whose stock is acquired by certain affiliates after December 31, 2022. The regulations also affect certain publicly traded foreign corporations that repurchase their stock or whose stock is acquired by certain affiliates after December 31, 2022.
More information can be found on the Inflation Reduction Act of 2022 page on IRS.gov.
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