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.

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.