On December 27, 2022, the Treasury Department issued Notice 2023-2, which is initial guidance regarding the excise tax that will apply to stock repurchased after December 31, 2022. Learn more about our previous alert after the law was passed in August 2022 here.
According to the Inflation Reduction Act, the excise tax will apply to conventional stock buybacks and economically similar transactions.
According to the Notice, economically similar transactions are as follows:
- Acquisition reorganizations
- Liquidations in which Sections 331 and 332 overlap
- Recapitalizing reorganizations under Section 367 (a)(1)(E)
- Transferor corporation reorganizations under Section 368(a)(1)(F)
The following transactions are not considered economically similar transactions:
- Distributions from complete liquidation and dissolution
- Section 355 transactions other than split-offs
According to the Notice, the tax base is reduced by the fair market value of stock issued during the taxable year (the netting rule). This includes option exercises and vesting of restricted stock. However, stock withheld to satisfy the exercise price of a stock option or a withholding obligation is not treated as a stock issuance. There are certain other issuances of stock that are disregarded for the purposes of the netting rule.
Companies will report the stock repurchase excise tax on Form 720, Quarterly Federal Excise Return. The excise tax will be reported once during the year on Form 720 and filed for the first quarter after the close of their taxable year. Therefore, the excise tax for a 2023 calendar-year taxpayer will be reported on Form 720 for the quarter ending March 31, 2024, which will be due by April 30, 2024. There is no extension for the return or the payment.
Taxpayers can rely on this initial guidance until proposed regulations are issued.
If you have any questions, please reach out to your Wolf tax professional.