IRS Proposes Regulations to Codify Stock Buyback Tax

The Internal Revenue Service proposed regulations on Wednesday that would implement the 1% excise tax on stock buybacks that was passed as part of the Inflation Reduction Act. The tax applies to repurchases made after December 31, 2022.

The proposal, which is open for comments, would exempt stock repurchases that do not exceed $1 million. Companies subject to the tax could also reduce the value of their buybacks by the value of stock that is issued in the same year. The tax on buybacks is not due until regulations are finalized, though the tax obligation still accrues starting from 2023.

Companies would have to report the excise tax on the Form 720 Quarterly Federal Excise Tax Return with Form 7208 attached. Form 7208, which “would be used to figure the amount of stock repurchase excise tax owed,” has not yet been finalized, though a draft version is accessible.

President Joe Biden has committed to increasing the tax on stock buybacks to 4% and his initial budget proposal for 2024 included such a measure, though it did not find its way into any 2024 budget bill. A budget table published by the Treasury Department estimated that increasing the tax to 4% would raise $15.3 billion in tax revenue in 2025.

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According to data from S&P Dow Jones Indices, stock buybacks fell in 2023 to $795.1 billion from $922.7 billion in 2022 among companies in the S&P 500 Index.

Buybacks can be popular because the money investors receive is taxed as capital gains, as opposed to issuing dividends, which are taxed as income. According to a 2023 study from the Wharton School of Business, buybacks also tend to be more supportive of stock price by increasing demand for shares. The study estimates that a buyback tax of about 4.6% would eliminate the tax preference of buybacks over dividends and a tax of 4% would raise $265 billion in federal revenue over a ten-year period.

The comment period for the proposed regulations ends on June 11.

Tags: IRS, stock buyback

New York City Comptroller Brad Lander and three NYC pension funds have reached agreements with JPMorgan Chase, Citigroup, and the Royal Bank of Canada requiring the banks to regularly disclose their ratio of clean energy supply financing to fossil fuel extraction financing and their underlying methodology.

“Despite their commitments to decarbonize, U.S. and Canadian banks have financed over $1 trillion of fossil fuel extraction since the Paris Accords,” Landers said in a statement. “The transition from financing fossil fuels to low-carbon energy is going far too slowly – and thus far, it hasn’t even been possible for shareholders to track.”

Lander said he expects energy supply ratio disclosure will become a “new standard” for the banking sector. The ratio is defined in the agreements as the total financing through equity and debt underwriting, and project finance, in low-carbon energy supply as a proportion of that in fossil-fuel energy supply. The calculation aims to highlight the real economic impacts of the banks’ energy supply financing and is intended to provide information for investors in an area where disclosure is currently opaque.

The comptroller said the disclosures will allow investors to more accurately determine a bank’s transition risks and opportunities, and gauge how well it is meeting its net zero and sustainable finance commitments, as well as the pace and scale of its transition to a low-carbon environment.

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Lander said the settlements followed shareholder engagements between the banks and the trustees of the New York City Employees’ Retirement System, the Teachers’ Retirement System, and the Board of Education Retirement System. The comptroller’s office touted the agreements as a “critical step” to better gauge how banks affect the climate transition, and whether they are on track to meet their emissions reduction commitments.

Lander and the pension funds currently have shareholder proposals filed with Bank of America, Goldman Sachs and Morgan Stanley and said they will continue engagement on the issue.

“We appreciate JPMorgan, Citi, and RBC agreeing to provide greater transparency so that long-term investors can more effectively measure how well they are or aren’t living up to their commitments,” Lander said. “We call on Bank of America, Goldman Sachs, and Morgan Stanley to follow suit at a time when our planet and investment portfolios are at risk.”