7555.1 / What is the new stock buyback tax created by the Inflation Reduction Act of 2022?

The Inflation Reduction Act of 2022 added a new 1 percent excise tax on stock buybacks. Publicly-traded corporations often use a stock buyback strategy when they believe that their shares are undervalued. To increase value, they buy their own corporate shares to decrease the number of shares that are available on the market. The tax applies to the fair market value of stock repurchased by “covered corporations,” which include domestic corporations whose stock is publicly traded on an established securities market. The tax also applies in cases where a corporation purchases stock of an affiliate (defined as a corporation if more than 50 percent of its stock is held, directly or indirectly, by the purchasing corporation).

The excise tax does not apply if the repurchase is part of a reorganization and no gain or loss on the stock repurchase is recognized.1 It also does not apply in situations where the repurchased stock is contributed to an employer-sponsored retirement plan, employee stock ownership plan (ESOP) or similar plan (or if an amount of stock equal to the value of the stock repurchased is contributed to such a plan).

The following transactions are also exempt:

Cases where the total value of the stock repurchased by the corporation during the tax year does not exceed $1 million;

Cases where the repurchase is by a dealer in securities in the ordinary course of business under regulations prescribed by the IRS;

Repurchases made by regulated investment companies (RICs) or a real estate investment trusts (REITs); or

In cases where the repurchase is treated as a dividend.

Under IRS proposed regulations,2 the aggregate fair market value of stock repurchased by a taxpayer during a taxable year is reduced by the aggregate fair market value of stock issued by the taxpayer during the taxable year. Additionally, the regulations would implement the statutory “de minimis” exception that provides that a taxpayer is not subject to the stock repurchase excise tax with respect to a taxable year if the aggregate fair market value of the stock repurchased by the taxpayer during the tax year does not exceed $1,000,000.

The stock repurchase excise tax is reported on Form 720, Quarterly Federal Excise Tax Return, and Form 7208, Excise Tax on Repurchase of Corporate Stock, is used to calculate the amount owed.

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Planning Point: Under IRS proposed regulations, for taxpayers with a tax year ending after December 31, 2022, but before the publication of final regulations, liability for the excise tax for the tax year must be reported on the Form 720 that is due for the first full quarter after the date the final regulations are published.  For tax years ending after December 31, 2022 and before June 30, 2024, the forms must be filed by the October 31, 2024 third quarter due date.  Taxpayers with more than one tax year ending during that period should file two separate Forms 720 and 7208.  The deadline for payment of the tax is the same as the filing deadline.

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There will be no addition to tax under IRC Section 6651(a) (or any other provision) for failing to file a return reporting the stock repurchase excise tax, or for failure to pay the stock repurchase excise tax, before the time specified in final regulations. Under previously released proposed regulations, the IRS required covered corporations to keep complete and detailed records to accurately establish any amount of stock repurchases (including repurchases made after December 31, 2022, but before the final regulations were published) and to retain these records as long as their contents may become material.3