Notice 2023-2: Rules for the Corporate Stock Buyback Tax

The Inflation Reduction Act of 2022 introduced a 1% excise tax on the value of corporate stock repurchased by certain companies. The Treasury Department and IRS have since issued regulations that guide companies on how to calculate, report, and pay the tax.

Scope of the Stock Buyback Tax

The stock buyback tax applies to “covered corporations,” which are domestic corporations whose stock is traded on an established securities market. This includes national stock exchanges as well as certain regional, foreign, and interdealer quotation systems.

A “repurchase” of corporate stock triggers the tax. The term extends beyond simple open-market buybacks to include redemptions, where a corporation acquires its stock from a shareholder. Transactions deemed “economically similar” to a redemption are also subject to the tax.

For instance, a leveraged buyout may be considered a repurchase if the target corporation ultimately assumes the debt used to purchase its own stock. Special rules also apply to foreign-parented entities. If a U.S. subsidiary funds a repurchase of its foreign parent’s stock, the U.S. subsidiary can be liable for the tax.

Calculating the Taxable Amount

The tax calculation begins with the aggregate fair market value (FMV) of all stock a corporation repurchases during its taxable year. The FMV is determined at the time of the repurchase and serves as the starting point for the final tax base.

A feature of the calculation is the “netting rule,” which permits a corporation to reduce its total repurchase amount by the FMV of any stock it issued during the same taxable year. This includes stock issued to the public and stock issued to employees through compensation plans.

To illustrate, suppose a corporation repurchases $50 million of its stock throughout its fiscal year. During that same year, it issues $10 million worth of new stock to employees and the public. Under the netting rule, the initial $50 million repurchase amount is reduced by the $10 million issuance, resulting in a net tax base of $40 million. The excise tax owed would be 1% of this amount, or $400,000.

This netting mechanism ensures the tax is levied on the net reduction in shares outstanding. The final tax paid is a non-deductible expense for the corporation.

Key Exclusions from the Tax

The law provides several specific exclusions that remove certain transactions from the stock buyback tax base. Key exclusions include:

• Stock repurchases that are part of a tax-free reorganization. When a corporation acquires another in a qualifying transaction, any stock repurchased as part of that deal is not subject to the tax.
• Stock that is repurchased by a corporation and subsequently contributed to an employer-sponsored retirement plan, such as a pension plan or an Employee Stock Ownership Plan (ESOP).
• Repurchases made by a dealer in securities during the ordinary course of its business are also exempt.
• A de minimis exception for companies whose total fair market value of stock repurchases during a taxable year is less than $1 million.

Complete corporate liquidations under specific sections of the tax code are also generally not considered repurchases.

Tax Reporting and Payment

Corporations subject to the stock buyback tax report their liability annually on Form 720, the Quarterly Federal Excise Tax Return. They must also attach Form 7208, Excise Tax on Repurchase of Corporate Stock, to detail the tax calculation.

While a transitional rule set a single 2024 deadline for the tax’s initial implementation, the ongoing rules are now in effect. The tax is due with the Form 720 for the first full calendar quarter after the end of the corporation’s taxable year. For example, a corporation with a calendar year ending December 31, 2024, must file and pay the tax by April 30, 2025.