Treasury Finalizes Reporting Rules for 1% Corporate Stock Buyback Tax

On June 28, 2024, the Treasury Department issued regulations (the “final procedural regulations”) finalizing proposed rules for the reporting and payment of the nondeductible 1% excise tax enacted on August 16, 2022 (as Section 4501 of the Internal Revenue Code) (the “Stock Repurchase Tax”). The stock repurchase tax generally applies to stock repurchases occurring after December 31, 2022 by domestic corporations and certain foreign corporations whose stock is traded on an established securities market (including any national, regional, local, or foreign securities exchange, and any interdealer quotation system) (“listed corporations”).

On April 9, 2024, the Treasury Department issued two sets of proposed regulations relating to the stock repurchase tax (see our earlier discussion of the proposed regulations, “Treasury’s New Guidance on the 1% Corporate Stock Repurchase Tax”). The first set addressed the scope and computation of the tax (“proposed computation regulations”). The second addressed the reporting and payment requirements of the tax (“proposed procedural regulations”). These final procedural regulations finalize only the proposed procedural regulations and largely follow the proposed procedural regulations with some minor modifications.

The key reporting and payment requirements under these final procedural rules are as follows:

General report. All publicly traded corporations, except real estate investment trusts (“REITs”) and regulated investment companies (“RICs”), that repurchase stock during a taxable year, regardless of whether the repurchase tax liability results, are required to file a stock repurchase tax return for that taxable year. The tax is paid annually on IRS Form 720 (Quarterly Federal Tax Return) due in the first full calendar quarter after the end of the trading company’s tax year. For example, the excise tax payment due date for 2024 for a trading company with a calendar year will be April 30, 2025 (for a trading company with a tax year ending January 31, 2025, the payment due date will be July 31, 2025). The new form, IRS Form 7208 (Excise duty on corporate share buybacks), requiring stock redemption tax information, must be attached to IRS Form 720.
Transition Report. Under the proposed procedural rules, the deadline for reporting and paying the stock repurchase tax was postponed until these final procedural rules were promulgated. Accordingly, under the final procedural rules, the deadline for reporting and paying the stock repurchase tax for taxable years ending after December 31, 2022, and on or before June 28, 2024 (the “transition period”) is October 31, 2024. If a publicly traded company has more than one taxable year ending during the transition period, the publicly traded company should file one IRS Form 720 with two separate Forms 7208 attached.
Payment. The share buyback tax must be paid no later than the tax filing deadline. There are no extensions to the tax filing deadline or payment.
Record keepingAll publicly traded corporations subject to the above reporting requirements, as well as REITs and RICs, are required to maintain complete and detailed records of all repurchases in a manner that supports the accuracy of any potential tax returns for the stock repurchases.

The issuance by the Treasury of final procedural regulations, in the absence of final computation regulations, is likely to complicate the reporting of stock repurchase tax for publicly traded companies to the extent that final computation regulations are not issued prior to the October 31, 2024 filing deadline. The rules in the proposed computation regulations will not be binding on publicly traded companies filing stock repurchase tax returns for the transition period to the extent there are differences between the proposed regulations and the final regulations.

The Treasury Department received extensive comments on the proposed computation regulations, and those comments are likely to cause the final computation regulations to differ at least somewhat from the proposed computation regulations. As a result, assuming the final computation regulations are not issued before October 31, 2024, publicly traded companies will be filing excise tax returns based on imprecise rules that, in some circumstances, could result in a significant overpayment of stock repurchase tax liability.

Three most important conclusions

The first share redemption excise tax returns will be due by October 31, 2024, and the first tax payments will be due upon the filing of those returns.
The accounting for and payment of share buyback tax may be based on a set of proposed calculation rules unless they are issued as final regulations before October 31, 2024.
Even if a publicly traded company’s share issuance equals or exceeds its repurchases, meaning it records no net repurchases during the tax year, the company must still report these repurchases on its annual share repurchase tax return.