Additional Guidance for One-Percent Corporate Excise Tax on Redemptions

September 5, 2023

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Key Takeaways

  • There is a new 1% excise tax on stock buybacks that applies to covered corporations (publicly traded, domestic corporations).
  • The excise tax is effective for repurchase transactions after December 31, 2022.
  • Payment is due in the first full quarter after regulations are finalized.

The Inflation Reduction Act enacted, through new code section 4501, a corporate, 1% excise tax on stock buyback transactions after December 31, 2022. The new tax is imposed on the fair market value of repurchased shares by covered corporations (publicly traded, domestic corporations), generally reducing the tax benefit of a redemption (buyback) over dividends.

Although the regulations are not yet published, corporations will be taxed on repurchase transactions after December 31, 2022. However, filing and payment will not be made until the first full quarter after the regulations are finalized.

What is a stock repurchase?

Corporations have two ways to distribute earnings to shareholders. Corporations may pay a dividend or pay shareholders to repurchase their stock. These transactions are economically similar; however, a stock repurchase is generally preferred by shareholders because of the favorable tax treatment.

Shareholders recognize dividend income in the full amount of a dividend when it is received. With a redemption, shareholders only pay tax on their realized gains, the difference between their redemption value and cost basis. A stock redemption generally results in less tax than an equivalent dividend transaction. However, the new 1% excise tax may reduce the tax benefit of a stock repurchase when comparing the two transactions.

What is the new excise tax?

  • The tax is 1% of the fair market value of stock repurchased, net of issuance.
  • The tax applies to covered corporations, defined as a publicly traded, domestic corporation.
  • A repurchase is the redemption of stock from its shareholders in exchange for property as found in Section 317(b), stock redemption and economically similar transactions.
  • The excise tax is nondeductible.

There are specific exceptions to the new excise tax, including:

  • Tax-free reorganizations
  • If the stock repurchased is contributed to an employer-sponsored retirement plan
  • De minimis repurchases, meaning total value of the stock repurchased during the year does not exceed $1,000,000
  • Security dealer transactions in the ordinary course of business
  • Repurchases by RICs and REITs
  • Dividend-equivalent repurchases

What are the next steps for the new excise tax?

Notice 2023-2, released January 2023, outlines interim guidance that taxpayers may rely upon until the proposed regulations are released.

  • Section 3 of the notice includes operating rules for repurchase transactions and Section 4 provides information on how to report and pay the tax.
  • Specifically, Form 720 is to be filed annually and payment is due the first full quarter after the close of the taxpayer’s tax year, extensions are not permitted.
  • Section 5 confirms that the rules are applicable for transactions after December 31, 2022.

Announcement 2023-18, released in June 2023, reminds taxpayers how to report and pay the new excise tax. The announcement also clarifies a possible filing and payment exception for fiscal year end and short year filers. If a corporation has an applicable stock buyback during their 2023 tax year, their Form 720 and excise tax payment may be due later than the first full quarter after the publication of the forthcoming regulations.

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