When Do Taxes Apply to Corporate Stock Repurchases?

 Posted on May 14, 2024 in Taxation Law

Corporate stock repurchases, also known as buybacks, are a common way for companies to return value to their shareholders. While repurchases can be beneficial for both a company and its shareholders, they also come with tax implications. The Inflation Reduction Act of 2022 created an excise tax that applies to corporate stock repurchases, and the IRS has provided guidance on how this tax will be calculated and the requirements that will apply to taxpayers. To ensure that these rules will be followed correctly, corporations and affiliates that engage in stock buybacks can work with an attorney who has a strong understanding of the applicable tax laws.

Understanding the Excise Tax on Stock Repurchases

Under the Inflation Reduction Act corporations are now subject to a 1% excise tax on the net value of stock they repurchase. This tax applies to stock repurchases performed after December 31, 2022.

When determining how the excise tax will apply to stock buybacks, the value of the repurchased stock is calculated based on the fair market value of the repurchased shares, and the value of any stock issued by the corporation during the same tax year is subtracted. The excise tax will apply to this aggregate fair market value of the repurchased stock. For example, if a company repurchases $100 million worth of stock and issues $20 million of stock in the same year, the value of the repurchased stock would be $80 million. The 1% excise tax on the repurchased stock would be $800,000.

The IRS provides an exception for stock repurchases below a certain amount. If the taxable value of stock repurchased within a tax year is less than $1 million, the excise tax will not apply.

Reporting Requirements

Compliance with IRS requirements is essential when performing stock repurchases. The IRS has proposed rules for how the excise tax will be reported and paid. These rules include the following guidelines:

• Forms to be filed: Corporations must report their stock repurchases on IRS Form 720, the quarterly return used to report excise taxes. This return must be accompanied by Form 7208, which will be used to calculate the total amount of excise tax that applies to stock repurchases. Taxes are due at the same time as the filing deadline for Form 720.

• Filing frequency: Corporations must begin reporting excise taxes on stock repurchases after the IRS issues a final rule regarding these taxes. If a corporation engaged in stock repurchases after December 31, 2022, it must report the excise tax that applies in a tax year on the quarterly Form 720 that is due after the end of that tax year. The first Form 720 must be filed after the first complete quarter following the issuance of the IRS’s final rule. For example, if the final rule is issued on September 16, 2024, and a corporation performed a stock repurchase in the tax year ending on December 31, 2024, the excise tax would be reported on the Form 720 that is due after the first quarter of 2025.

Contact Our San Jose, CA Corporate Tax Lawyer

When addressing the complexities of the new excise tax on corporate stock repurchases, it is crucial to meet all requirements put in place by the IRS, report information to the IRS accurately, and calculate and pay any taxes owed. At John D. Teter Law Offices, our San Jose tax attorney can help ensure compliance with the IRS’s requirements while providing guidance on how to minimize the amounts that must be paid. With our understanding of the latest IRS rules and regulations, we are ready to help corporations manage tax issues effectively. Contact us at 408-866-1810 to set up a consultation and learn how we can assist with corporate tax concerns.

Sources:

https://www.irs.gov/newsroom/treasury-and-irs-announce-new-regulations-on-corporate-stock-repurchase-excise-tax

https://www.federalregister.gov/documents/2024/04/12/2024-07118/excise-tax-on-repurchase-of-corporate-stock-procedure-and-administration