The new 1% excise tax on stock buybacks contained in the Inflation Reduction Act could potentially impact a surprisingly wide range of transactions — including special purpose acquisition companies (SPACs) liquidations, Ernst & Young tax experts said in a webinar this week.
Under the Inflation Reduction Act signed into law last month, publicly traded companies beginning next year must pay a 1% tax on the fair market value of the stock over $1 million that they buy back during a tax year. The tax can be offset by stock issuances including stock options issued to employees.
In the most basic scenario, this would mean a public company that racked up $100 million in buybacks in 2023 but did not issue any shares would owe excise tax of $1 million, according to EY webinar material. Likewise, a public company that repurchases $100 million but issues $125 million of stock as part of a compensation plan for its employees should in theory pay no added tax due to the offsets.
But the devil will be in the details — or more literally the guidance that experts are awaiting on the new tax from the U.S. Treasury. For example, it is unclear how shares bought back in leveraged going-private transactions would be affected by the tax. Likewise SPAC entities might fall within the purview of the new tax if they are unable to find an acquisition partner and return cash to their shareholders, EY experts said.
“The most profound impact of the stock repurchase excise tax may be on corporate transactions that bear little resemblance to the prototypical stock repurchase program that Congress presumably had in mind,” Shane Kiggen, principal in EY’s National Tax M&A International Tax and Transaction Services, said during the webinar.
There is also uncertainty around how the tax will account for stock options issued to employees that can be used as an offset, Rachael Walker, a principal in EY’s National Tax Compensation and Benefits Practice, said during the webinar. “If it’s when it’s exercised, then the issuance of an option would not generate the offset,” she said.
Companies should take the time this year to reassess their strategies before the new tax goes into effect, Don Bakke, also a principal with EY’s National Tax M&A International Tax and Transaction Services, said during the webinar. They might want to consider accelerating repurchases now or delaying issuances until 2023, he said.
A spokesperson for the Internal Revenue Service declined to comment on when or if guidance would be forthcoming.
The new tax comes as the blistering pace of stock pace slowed in the second quarter, according to The Wall Street Journal. For the 12 months through March the value of stock buybacks completed by S&P 500 companies jumped 97.2% to $985 billion compared to $499 billion in the year-earlier period, according to a June 16 S&P Dow Jones Indices release. Howard Silverblatt, senior index analyst at S&P, said buybacks could reach a new high this year as lower share prices make buybacks less costly and smaller share counts yield higher earnings per share, according to the release.
