IRC Section 4501: The Corporate Stock Repurchase Tax

Internal Revenue Code (IRC) Section 4501 introduced a new consideration for publicly traded companies engaging in stock buybacks. Enacted as part of the Inflation Reduction Act of 2022, this provision established a non-deductible 1% excise tax on the value of a corporation’s stock that it repurchases. The tax applies to repurchases made after December 31, 2022. This legislation serves as a revenue-raising mechanism and targets the common corporate practice of buying back shares from the open market, a strategy used to return value to shareholders.

Identifying a Covered Corporation

The stock repurchase excise tax applies specifically to entities defined as “covered corporations.” A covered corporation is a domestic U.S. corporation whose stock is traded on an established securities market, such as the New York Stock Exchange or NASDAQ.

The regulations extend the definition to more complex international structures. The tax can apply to certain U.S.-based subsidiaries of foreign corporations whose stock is publicly traded on a foreign market. In these situations, the U.S. subsidiary itself can be treated as a covered corporation when it acquires the stock of its foreign parent.

This treatment is designed to prevent tax avoidance. For instance, if a U.S. subsidiary funds the repurchase of its foreign parent’s stock, whether through distributions, debt, or other means, and a principal purpose of this funding is to avoid the excise tax, the transaction falls within the scope of the law. The U.S. subsidiary is then held responsible for the tax liability on the value of the foreign parent’s stock it acquires.

Calculating the Stock Repurchase Excise Tax Base

The foundation of the tax calculation is the total value of stock repurchased during a corporation’s taxable year. A “repurchase” is broadly defined to include not only a corporation buying its own shares but also redemptions and transactions deemed “economically similar.” The value used for this initial calculation is the aggregate fair market value (FMV) of all stock repurchased during that annual period.

A feature of Section 4501 is the “netting rule,” which allows corporations to reduce their tax base. This rule permits a covered corporation to subtract the aggregate FMV of any of its stock that it issued during the same taxable year, meaning the 1% tax is applied to the net value of buybacks. Qualifying issuances include several common corporate actions. Stock issued to employees, including stock provided upon the exercise of employee stock options, counts toward this reduction. Stock sold to the public through an initial or secondary offering and stock used as consideration to acquire another company also qualify.

The stock repurchase excise tax base is the total FMV of repurchased stock minus the total FMV of issued stock. For example, if a corporation repurchases $500 million of its stock and, during that same year, issues $150 million of stock to employees and in a secondary offering, its tax base is $350 million ($500M – $150M). The excise tax owed would then be 1% of this amount, or $3.5 million.

Transactions Excluded from the Tax

Certain repurchases are entirely excluded from the tax base calculation, operating separately from the netting rule for issuances. One exclusion applies to repurchases that are part of a tax-free corporate reorganization. If a stock buyback occurs as part of a merger or acquisition where shareholders of the target company do not recognize gain or loss, the value of those repurchased shares is not subject to the excise tax.

The law also provides a de minimis threshold, so if the total fair market value of a corporation’s stock repurchases within a taxable year is less than $1 million, the excise tax does not apply. Further exclusions include:

• Contributions of a corporation’s stock to an employer-sponsored retirement plan, such as a 401(k) or an Employee Stock Ownership Plan (ESOP).
• Repurchases conducted by a dealer in securities during the ordinary course of its business.
• Any repurchases made by Regulated Investment Companies (RICs) or Real Estate Investment Trusts (REITs).
• A repurchase that is properly characterized as a dividend for income tax purposes.

The rules permit stock contributed to an employee benefit plan before the tax return filing deadline to be treated as contributed in the prior tax year, offering some planning flexibility.

Reporting and Payment Procedures

A corporation must follow specific procedures for reporting and payment. The tax is calculated and reported using Form 7208, Excise Tax on Repurchase of Corporate Stock. This form must be attached to Form 720, the Quarterly Federal Excise Tax Return.

Although Form 720 is a quarterly return, the stock repurchase excise tax is handled on an annual basis. A covered corporation calculates its liability for its entire taxable year but reports and pays it only once per year. The payment is due with the Form 720 for the first full calendar quarter following the close of the corporation’s taxable year.

For example, a company with a calendar taxable year ending on December 31, 2024, would report and pay the tax with its Form 720 for the first quarter of 2025. The due date for this return is April 30, 2025, and no extensions are permitted for this payment.