IRS Suggests Rules for Stock Buyback Excise Tax

TL/DR –

The US Treasury Department and the IRS have issued proposed rules providing guidance on the Inflation Reduction Act’s 1% excise tax on corporate stock repurchases or buybacks. The Inflation Reduction Act of 2022 imposes this tax on stock repurchases by publicly traded domestic corporations and their specified affiliates. The proposed regulations include an anti-abuse rule targeting foreign-parented multinational corporations, implement a statutory netting rule, and establish a “de minimis” exception for taxpayers whose aggregate fair market value of repurchased stock in a taxable year does not exceed $1 million.

New Guidance on Stock Buyback Excise Tax from Treasury Department and IRS

The Treasury Department and IRS unveiled proposed rules on the 1% excise tax on corporate stock repurchases under the Inflation Reduction Act. The rules aim to clarify the tax calculation and payment process for taxpayers and tax professionals. This follows the interim guidance previously issued in Notice 2023-02.

“The Inflation Reduction Act encourages large corporations to pay their due share, promoting tax fairness and deficit reduction,” said Treasury Secretary Janet Yellen, asserting the importance of these regulations in closing tax loopholes.

The Act imposes an excise tax on stock repurchases by publicly traded domestic corporations and specified affiliates from January 1, 2023. The excise tax applies at a rate of 1% of the fair market value of repurchased stocks, minus the aggregate value of issued stocks during the same taxable year. Economically similar transactions to redemptions of stock are also considered repurchases.

The proposed regulations also feature an anti-abuse rule for foreign-parented multinational corporations, ensuring that they pay their share of the stock buyback excise tax. These regulations would affect companies that repurchase their stock or whose stock is acquired by certain affiliates.

The rules also implement a netting rule that reduces the aggregate value of repurchased stocks by the value of issued stocks during the same year. The “de minimis” exception exempts taxpayers from the excise tax if the aggregate value of repurchased stocks doesn’t exceed $1 million in a taxable year.

The stock repurchase excise tax must be reported on Form 720, attached with Form 7208. A draft version of Form 7208 is currently available, with the final version to be released ahead of the first due date for reporting and payment of the tax.

The proposed regulations specify that for taxpayers with a taxable year ending after Dec. 31, 2022, any liability for the tax must be reported on the Form 720 due for the first full quarter after the final regulations are published. The tax payment deadline coincides with the filing deadline.

The deadline for written comments on the proposed regulations will be announced at a later date.

—
Read More US Economic News