August 8, 2022

Buybacks: Summary of the New Excise Tax on Corporate Stock Repurchases

Yesterday, the Senate passed the 755-page Inflation Reduction Act of 2022. Among its other provisions, the legislation imposes an excise tax equal to 1% of the fair market value of any stock that a company repurchases during its fiscal year (see p. 31). I remember a tax prof in law school saying something like excise taxes are always simple, because the government just takes a slice off the top, which probably explains why this part of the statute is only about 6 pages long. This excerpt from a Congressional Research Service report provides an overview of the excise tax provision:

A provision in H.R. 5376 would impose a 1% excise tax on the repurchase of stock by a publicly traded corporation. The amount subject to tax would be reduced by any new issues to the public or stock issued to employees. The tax would not apply if repurchases were less than $1 million or if contributed to an employee pension plan, an employee stock ownership plan, or other similar plans.

The tax would not apply if repurchases were treated as a dividend. It would not apply to repurchases by regulated investment companies (RICs) or real estate investment trusts (REITs). It also would not apply to purchases by a dealer in securities in the ordinary course of business. The excise tax would apply to purchases of corporation stock by a subsidiary of the corporation (i.e., a corporation or partnership that is more than 50% owned by the parent corporation). The tax would also apply to purchases by a U.S. subsidiary of a foreign-parented firm. It would apply to newly inverted (after September 20, 2021) or surrogate firms (i.e., firms that merged to create a foreign parent with the former U.S. shareholders owning more than 60% of shares).

In general, excise taxes can be deducted to determine profits subject to the corporate tax, so that the tax is reduced by the corporate tax rate (21%). That is, for a profitable corporation each dollar of excise tax reduces profits taxes by 21 cents. The language specifies that this tax would not be deductible, so there would be no corporate profits tax offset.

You probably noticed that this summary describes the House version of the bill, but the Senate version appears to be the same. The rationale for the excise tax – beyond the horse trading required to get Senator Krysten Sinema (D – Ariz.) to support the legislation – is that dividends and repurchases should have similar tax consequences. This excerpt from the Center on Budget Policy and Priorities’ statement on the legislation summarizes that position:

Dividends are generally taxable when shareholders receive them. Under a stock buyback, in contrast, shareholders who sell their shares to the corporation at a gain owe capital gains tax but shareholders who don’t sell their shares — typically the overwhelming proportion — see the value of their shares rise but don’t pay tax on the gain until they sell. Their wealth increases but their taxes don’t. By imposing a 1 percent excise tax on share buybacks, this provision is designed to correct this tax policy inefficiency.

The legislation now goes back to the House, where it is expected to pass and subsequently be signed into law by President Biden.  Check out this resource for more technical details on the legislative process.

John Jenkins