On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (the Act). Equity compensation professionals should be aware that for fiscal years commencing after December 31, 2022, the Act introduces a 1 percent excise tax that will be applied to the fair market value of the firm’s stock repurchases, sometimes called share “buybacks,” during the fiscal year.
This article:
- Alerts readers around the new tax on buybacks
- Alerts readers around how broad-based stock programs can offset part of the tax
- And presents the expected impact on broad-based stock programs
Background and Application of the Excise Tax
The Act specifies that a 1 percent excise tax will apply to the fair market value of net repurchases made by, generally, publicly traded US corporations. However, the taxable amount can be reduced by issuances of equity to employees, meaning that firms can deduct the aggregate fair market value of any shares provided to employees, including as part of employee awards, an employer-sponsored retirement plan or as part of an employee stock ownership plan.
While the Act is meant to apply to firms engaging in share repurchase programs, the Act carves out specific instances where the excise tax would not apply, including when a firm’s buyback total is less than one million dollars or when the shares purchased are part of a reorganization like a spin-off (i.e., the buybacks do not make a net positive impact to shareholders).
Aon observes that, once again, legislators have sought to codify favorable treatment for firms with Employee Stock Purchase Plans (“ESPP”). IRC 423-qualified ESPPs represent efficient ways for employees to share in the firm’s stock price appreciation and, further, help foster a broad culture of employee ownership. According to Aon’s published data, 49 percent of the S&P 500 firms had an ESPP, whereas 38.5 percent of Russell 3000 firms had an ESPP in 2020.