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.