Congress created a new section of the tax code 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. Now, the IRS has issued proposed regulations that would provide new guidance related to the tax.
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. When companies issue dividends, those earnings are typically taxed at ordinary income tax rates. 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
On January 17, 2023, the IRS issued a notice that the agency intended to issue proposed regulations addressing the application of the new excise tax on repurchases of corporate stock under section 4501. The notice also provided initial guidance on applying the stock repurchase excise tax and set forth certain interim operating rules for determining the amount of stock repurchase excise tax owed.
Transactional guidance was issued in July of 2023.
On April 9, 2024, the IRS issued 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.
Under the proposed regulations, the tax would be reported on Form 720, Quarterly Federal Excise Tax Return, with Form 7208, Excise Tax on Repurchase of Corporate Stock, attached.
The IRS has made a draft version of the Form 7208 accessible. The final version of the form will be released before the first due date on which the tax must be reported and paid.
Under the proposed regulations, for taxpayers with a taxable year ending after December 31, 2022, but before the publication of final regulations, any liability for the tax must be reported on Form 720, due on the first full quarter after the date the final regulations are published, and that the deadline for payment of the tax is the same as the filing deadline.
Written Comments
The IRS is seeking comments on the proposed regulations. Those must be submitted by the following dates:
Read the full article here
