The Internal Revenue Service (IRS) and the Treasury Department have issued the final regulations related to how corporations should report and pay the 1% excise tax on stock repurchases. The effective date of these final regulations is June 28, 2024. Corporations have been awaiting this final guidance from the IRS ever since the proposed guidance was issued in early 2024, which stated that, while the excise tax applied to stock repurchases made after December 31, 2022, the reporting and payment of such tax would not be due until a date after the final regulations were issued.
The final regulations clarify the reporting and payment requirements for the excise tax, including the due date for the period after December 31, 2022, and before June 28, 2024. Important guidance provided in the final regulations include:
- Corporations must report the stock repurchase excise tax on Form 720, Quarterly Excise Tax Return. The form is due for the first complete calendar quarter following the end of the corporation’s taxable year. This means that, for a calendar year corporation, the excise tax would be reported and paid with their first quarter Form 720, which has a due date of April 30th. A corporation with a June 30th year-end would report and pay the excise tax with its Form 720 for the quarter of July – September,which is due October 31st.
- In addition to Form 720, a new form, Form 7208, Excise Tax onRepurchase of Corporate Stock, is to be attached when filing. This formis used to calculate the excise tax due.
- For taxable years ending between January 1, 2023, and June 28, 2024, the payment of the excise tax is to be included with Form 720, due October 31, 2024. This means that, for calendar year taxpayers, the excise tax for the period of January 1, 2023 – December 31, 2023, must be paid with the third quarter 2024 Form 720. If a corporation has more than one taxable year ending in this period, it should file one Form 720 with separate Forms 7208 for each year.
- A stock repurchase excise tax return must be filed for any year in which a covered corporation makes a stock repurchase or is treated as making a stock repurchase.
- Regulated investment companies and real estate investment trusts are exempt from the excise tax.
- Final regulations were not issued at this time related to guidance regarding the actual computation of the stock repurchase tax. The IRS intends to finalize these proposed regulations at a future time.
Based on the final rules issued, corporations should plan to file and pay the first excise tax they are subject to on or before October 31, 2024. At this time, Form 7208 and its instructions are still only available as “draft” versions; however, since the final regulations have not significantly changed the requirements, corporations should review the draft form and instructions to calculate their potential excise tax, if any, that will need to be paid by October 31, 2024, and begin to prepare for the filing of the proper Form 720/Form7208.
While the final regulations issued serve to clarify much of the guidance related to the excise tax, including how to report/pay the tax, and the due date of the tax for periods ending between January 1, 2023, and before June 28, 2024, there are still some uncertain issues related to the excise tax calculation that will not be resolved until the final regulations are issued regarding the calculation of the tax. Until the time that those regulations are finalized, the proposed regulations and the draft instructions to Form 7208 can be used to calculate the expected excise tax due.
Corporations should consult with their tax advisor regarding any questions related to the filing or calculation of potential excise tax liability. If it is anticipated that our assistance will be needed for this, please contact us as early as possible so that we can discuss.
Background of 1% Stock Repurchase Excise Tax
The Inflation Reduction Act of 2022 (IRA) imposed a 1% excise tax on stock repurchases by covered corporations occurring after December 31, 2022. The excise tax is on the fair market value of stock repurchases for the tax year. The tax applies to covered corporations that have their stock traded on an “established securities market,” which would include all national security exchanges, NASDAQ, and “any interdealer quotation system that regularly disseminates firm buy or sell quotations by identified brokers or dealers by electronic means or otherwise.”
The tax is based on the “stock repurchase excise tax base,” which is calculated as the fair market value of all repurchases for the year, reduced by (in order):
- Statutory exceptions, which include, among others, repurchases: (1) that are part of certain tax-free reorganizations; (2) where the stock repurchased is contributed to an employer-sponsored retirement plan, ESOP, or similar plan; (3) treated as dividends; and (4) in which the total value of stock repurchased during the taxable year does not exceed $1 million.
- The fair market value of any stock reissued during the taxable year.
While the excise tax applies to repurchases after 2022, proposed regulationswere issued that delayed the payment and reporting of the tax until a dateafter the proposed regulations are finalized (which were done, in part,effective June 28, 2024, and described above).1.
If you wish to discuss any of the matters in this update in more detail, please contact Danelle Stewart or Charles Marston or call 724-934-0344 (Cranberry Township, PA office) or 304-233-5030 (Wheeling, WV office).
