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Inflation Reduction Act Introduces New 1% Tax on Stock Buybacks

September 15, 2022

Attention businesses…are you up to speed on the new 1% excise tax on corporate stock buybacks? The tax takes effect in 2023…here’s what you should know.

Have you read our blog, Biden Signs Inflation Reduction Act: What are the Key Tax Provisions? You’ll want to check it out for some valuable insight on the recently passed Inflation Reduction Act. The Act introduces many tax changes including a new 1% excise tax on certain stock buybacks…here are the details.

What is a stock buyback?

Sometimes referred to as a stock repurchase, a stock buyback occurs when a company repurchases its own stock, thus reducing the total number of shares outstanding. Companies will use stock buybacks to pay off debts, invest in operations, buy another company or pay out the money as a dividend to their investors.

What is the new corporate excise tax?

The Act imposes a non-deductible 1% excise tax on the value of stock repurchases of a “covered corporation” (during the taxable year), net of new issuances of stock.

A “covered corporation” is a domestic corporation that is traded on an “established securities market”. In some circumstances, certain purchases of stock of publicly traded non-domestic corporations by their domestic subsidiaries will also apply.

Special purpose acquisition companies (SPACs) may be unexpectedly subject to this excise tax.

Is anything excluded from the tax?

The following are excluded from the 1% excise tax:

  • Total repurchased stock of $1 million or less for the taxable year
  • Buybacks treated as dividends
  • Tax-free reorganizations
  • Stock buybacks that are contributed to employer sponsored retirement plans, employer stock ownership plans or similar plans
  • Certain buybacks by a securities dealer in the ordinary course of business
  • Buybacks by regulated investment companies (RICs)
  • Buybacks by real estate investment trusts (REITs)

When does the tax take effect?

The tax applies to repurchases of stock after December 31, 2022.

Questions? Contact us.

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