The U.S. Department of the Treasury and Internal Revenue Service (IRS) have released proposed regulations on the stock buyback excise tax, a provision of President Biden’s Inflation Reduction Act.
This tax targets large corporations that repurchase their own shares, aiming to encourage investment in areas like worker wages and innovation.
Closing the Loophole
Previously, the tax code favored stock buybacks, leading some companies to prioritize them over reinvesting profits in growth and employees. The new tax aims to address this by imposing a 1% levy on the fair market value of stock a corporation repurchases during its tax year. This is offset by the value of any new stock the company issues.
Who’s Affected?
The tax applies to “covered corporations,” which are generally domestic companies with publicly traded stock on established exchanges like the New York Stock Exchange. The definition also includes some foreign exchanges and interdealer quotation systems.
What Counts as a “Repurchase”?
The tax targets not just traditional buybacks but also acquisitions of a company’s stock by shareholders in exchange for qualifying property. The act further empowers the Treasury Secretary to define any transactions “economically similar” to stock redemptions as subject to the tax. This could include buybacks related to mergers, acquisitions, or certain transactions involving affiliated companies.
Preventing Abuse
The proposed regulations include measures to prevent foreign-owned corporations from exploiting loopholes. These measures aim to ensure multinational corporations pay their fair share while excluding ordinary intercompany funding transactions.
Reporting and Payment
Companies will report the stock buyback excise tax on IRS Form 720, the Quarterly Federal Excise Tax Return. A separate form, Form 7208, will be used to calculate the tax owed. While a draft of Form 7208 is available, the final version will be released before the first tax filing deadline.
Retroactive Application
For corporations with tax years ending after December 31, 2022, but before the final regulations are published, any excise tax liability will be reported on the Form 720 due after the final regulations are issued. The deadline for payment will coincide with the filing deadline.
This move by the Treasury and IRS provides much-needed clarity for corporations and tax professionals navigating the new stock buyback excise tax. It remains to be seen how this tax will impact corporate behavior and investment strategies in the long run.
