Flash Alert: New IRS Excise Tax Rules on Stock Repurchase: Key Changes for Corporations
- Posted by admin
- On July 15, 2024
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To address the growing practice of corporate stock repurchases, a need has arisen to ensure that corporations contribute their share to the national treasury. In response, the Inflation Reduction Act of 2022 introduced a new excise tax on specific repurchases of corporate stock. This tax affects publicly traded corporations in the United States, mandating contributions to the national treasury when they engage in stock repurchase.
Under the existing guidance, specifically ‘Notice 2023-2’, the Internal Revenue Service (IRS) laid the groundwork for what would become a pivotal shift in corporate tax obligations. The excise tax, levied at 1% of the fair market value, applies to stock repurchases by certain publicly traded domestic corporations or their specified affiliates, with transactions after December 31, 2022, falling under its purview. However, like any tax law, there are nuances and exceptions, including repurchases that are part of a reorganization or total stock repurchased does not exceed $ 1 million, among others.
On April 9, 2024, the Treasury and IRS unveiled two sets of proposed regulations:
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Clarification on Application:
- This set focuses on the tax’s application, including definitions, scope, and exceptions.
- Clarity is essential for corporations to precisely determine which transactions are subject to the tax and which are exempt, reducing ambiguity and compliance risks.
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Procedural and Administrative Rules:
- This set outlines how corporations should report and pay taxes.
- Specifies due dates aligned with the publication of final regulations, offering a roadmap for compliance.
On June 28, 2024, the IRS and the Treasury Department released the final regulations on how tax professionals and companies should report and pay the excise tax. These regulations stipulate:
- The stock repurchase excise tax must be reported on Form 720, Quarterly Federal Excise Tax Return.
- Form 7208, Excise Tax on Repurchase of Corporate Stock, must be utilized to determine the excise tax amount owed.
For taxable years concluding after December 31, 2022, and before June 30, 2024:
- Forms 720 and 7208 must be submitted by October 31, 2024, the third quarter deadline for Form 720.
- If a corporation has multiple taxable years ending within this timeframe, it should file one Form 720, attaching two separate Forms 7208 (one for each taxable year) by the October 31, 2024 deadline.
These regulations are applicable to:
- Publicly traded domestic corporations that repurchase their stock or have their stock acquired by certain affiliates after December 31, 2022.
- Certain foreign corporations that repurchase their stock or whose stock is acquired by certain affiliates after Dec. 31, 2022.
Summary of Reporting Requirements
| Form | Description | Deadline |
| Form 720 | Quarterly Federal Excise Tax Return | October 31, 2024 |
| Form 7208 | Excise Tax on Repurchase of Corporate Stock | October 31, 2024 |
| Multiple Taxable Years | Single Form 720 with two separate Forms 7208 (one for each tax year) attached | October 31, 2024 |
Conclusion:
The regulations on the excise tax for stock repurchases represent a significant development in corporate taxation, demanding close attention from publicly traded corporations. The regulations aim to ensure a smooth transition to the new tax regime by offering clarity on the tax’s application and compliance procedures. Corporations must stay vigilant, adapt to these changes, and consider the broader implications of their stock repurchase decisions in this new tax landscape.
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