New IRS Rules Clarify 1% Tax on Corporate Stock Buybacks: The Internal Revenue Service (IRS) recently issued proposed regulations clarifying the application of the 1% stock buyback tax introduced by the Inflation Reduction Act. This tax applies to repurchases of stock by certain corporations after December 31, 2022.
What is the Stock Buyback Tax?
The stock buyback tax, also known as the stock repurchase excise tax, is a 1% tax imposed on the fair market value of stock repurchased by certain corporations during a taxable year. This tax is intended to discourage companies from using excess cash for stock buybacks, potentially encouraging them to invest in areas like research and development or employee wages.
Who is Affected by the Stock Buyback Tax?
The proposed regulations primarily impact:
- Publicly traded domestic corporations that repurchase their own stock.
- Publicly traded domestic corporations whose stock is acquired by certain affiliates.
- Certain publicly traded foreign corporations that repurchase their stock or whose stock is acquired by certain affiliates.
Key Points of the New IRS Guidance:
The new regulations address several key aspects of the stock buyback tax:
- Netting Rule: This rule allows companies to reduce the taxable amount by the fair market value of stock issued during the same taxable year. This encourages investment in growth through new stock issuance.
- De Minimis Exception: Companies repurchasing stock with a total fair market value not exceeding $1 million in a taxable year are exempt from the tax.
- Reporting Requirements: The tax must be reported on Form 720 (Quarterly Federal Excise Tax Return) with the attached Form 7208.
- Comment Deadlines: Companies can submit written comments on the proposed regulations by the deadlines specified in the announcement. which are as follows,
Deadlines for Public Comment
- REG-118499-23 (Procedure and Administration): May 13, 2024
- REG-115710-22 (Stock Buyback Tax): June 11, 2024
What Should Corporations Do Now?
Corporations engaging in stock buybacks should carefully review the new IRS guidance to determine their potential tax liability. Consulting with a tax professional familiar with the stock buyback tax is recommended for a tailored assessment. Companies can also consider submitting comments on the proposed regulations before the deadlines.
By understanding the implications of the 1% stock buyback tax and the new IRS guidance, publicly traded companies can make informed decisions regarding their stock repurchase activities.
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