US Treasury and IRS Issue Final Regulations on Excise Tax for Stock Repurchases

The US Inflation Reduction Act of 2022 introduced Section 4501, imposing a 1% excise tax on stock repurchases by certain publicly traded corporations, effective from December 31, 2022. Following this, the Treasury Department and the IRS have been rolling out guidelines to help taxpayers comply with this new provision.

INITIAL GUIDANCE AND PROPOSED REGULATIONS

On December 27, 2022, the Treasury and the IRS issued Notice 2023-2, announcing their intention to provide detailed regulations and interim guidance on the new excise tax. Subsequently, on April 12, 2024, they published proposed regulations addressing both the procedural and computational aspects of the excise tax.

FINAL PROCEDURAL REGULATIONS

On June 28, 2024, the Treasury and the IRS released the final procedural regulations (T.D. 10002). These regulations provide comprehensive instructions on reporting and paying the excise tax, finalizing the proposed procedural guidelines with some modifications.

KEY REPORTING AND PAYMENT GUIDELINES:

1. Form 720 Filing: The excise tax must be reported on Form 720, Quarterly Federal Excise Tax Return, along with Form 7208, which details the tax computation. Both forms are available under the link at the bottom of this article.
2. Reporting Schedule: The excise tax is to be reported annually on the Form 720 due for the first full quarter after the close of the taxpayer’s taxable year. The payment deadline aligns with the filing deadline.
3. Example for Compliance: A corporation whose taxable year ends on December 31 must report and pay the excise tax by April 30 of the following year.

Special Instructions for Past Taxable Years: For taxable years ending after December 31, 2022, and before June 28, 2024, the excise tax return is due by October 31, 2024.

Example: A corporation whose taxable year ends December 31, 2023, must file its excise tax return by October 31, 2024.

RECORDKEEPING REQUIREMENTS

The final regulations mandate that covered corporations or persons maintain detailed records of all repurchases, adjustments, or exceptions. These records must be available for IRS inspection and retained for as long as they may be relevant.

RETURN REQUIREMENT

Covered corporations, except regulated investment companies (RICs) and real estate investment trusts (REITs), must file a stock repurchase excise tax return for any taxable year in which a repurchase occurs. RICs and REITs are exempt from filing if all repurchases qualify for the statutory repurchase exception but must adhere to recordkeeping requirements.

SIGNING AND TAX RETURN PREPARERS

The regulations stipulate that an authorized person must sign the stock repurchase excise tax return. They also outline additional rules and penalties applicable to tax return preparers, ensuring accurate and compliant tax preparation and filing.

APPLICABILITY DATES

The final procedural regulations apply to repurchases and related reporting for any stock repurchase excise tax return required to be filed after June 28, 2024, and during taxable years ending after this date.

FUTURE COMPUTATIONAL REGULATIONS

While the final procedural regulations have been issued, the proposed computational regulations, which provide detailed rules for calculating the excise tax, are still pending.

SOURCES/ RECOMMENDED READ:

• Federal Register :: Excise Tax on Repurchase of Corporate Stock-Procedure and Administration
• Deloitte | tax@hand (taxathand.com)
• Form 720  Form 720 (Rev. June 2024) (irs.gov)
• Form 7208 Form 7208 (June 2024) (irs.gov)