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August 19, 2022

The New Stock Buyback Excise Tax

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Inflation Reduction Act

As a previous compromise from the original Build Back Better proposal, President Biden recently signed into law the Inflation Reduction Act. This act includes a wide variety of provisions, and  the following are among the most relevant:

  • 1% excise tax on the value of stock buybacks.
  • $374 billion in climate and energy spending, such as expanded tax credits for renewable energy projects. It also ends per-manufacturer limits for the $7,500 tax credit for purchases of electric vehicles.
  • Corporate Alternative Minimum Tax of 15% of a corporation’s adjusted financial statement income (“Book Income”) for the tax year, reduced by a Corporate Alternative Minimum Foreign Tax Credit. The tax only applies to:
    • Domestic corporations with Book Income over $1 billion for the three prior years, and
    • Domestic corporations in a foreign-parented multinational group where (a) the domestic corporation has an average Book Income of at least $100 million and (b) the foreign group has an average Book Income of more than $1 billion, for the three prior years.
  • $80 billion boost to the IRS for enforcement.
  • Medicare will be allowed to negotiate certain drug prices, starting with 10 high-priced drugs in 2026 and expanding from there.

Stock Buyback Excise Tax

Beginning after December 31, 2022, the act imposes a 1% excise tax on the fair market value of any stock repurchased by a domestic corporation listed on an established securities market during a taxable year.

Accordingly, the tax applies to entities with stock listed on national exchanges (e.g., NYSE and NASDAQ), applicable foreign securities exchanges (e.g., London Stock Exchange), and over-the-counter (OTC) securities markets (e.g., OTCQX, OTCQB, and Pink Markets).

In addition, there are rules that might trigger the tax on repurchases made by (1) affiliates of a listed corporation; and (2) US affiliates of a listed foreign corporations.

The excise tax is not tax deductible.

Exceptions

The tax does not apply in the following cases: (1) tax-free reorganizations; (2) employer-sponsored retirement plans, stock options, or similar plans (3) total value of the stock repurchased during the year does not exceed $1,000,000; (4) repurchases by a dealer in the ordinary course of business; (5) repurchases by a regulated investment company or a real estate investment trust; and (6) repurchases treated as a dividend.

We Can Help

Timing is critical here. If you are planning any future buybacks, redemptions, or any large equity transactions, it may be best to act quickly or reconsider how this might affect your plans. We are happy to discuss any questions you might have about this new excise tax and your tax planning needs.

The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.

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