When Congress changes the tax code, it can take the IRS months, sometimes years, to write regulations interpreting the new law. It is common for new tax rules to take effect well before regulations are issued, so taxpayers are faced with complying with the new rules before they are told how to. The solution has been to swiftly draft notices to provide taxpayers with interim guidance on new provisions, which the IRS has recently done for the corporate changes contained in the Inflation Reduction Act, enacted in August 2022.
The IRS has released two notices, Notice 2023-07, on the corporate minimum tax, and Notice 2023-2, on the new excise tax on stock buybacks, to explain how these provisions will apply. These notices provide time-sensitive information, and the IRS expects to follow up with future notices on other aspects of the new law. Below is a look at the important information in these notices.
Corporate Minimum Tax
The Inflation Adjustment Act imposes a 15% minimum tax on the adjusted financial statement income of large corporations, those with average annual financial statement income (AFS) in excess of $1 billion. The tax applies to corporate taxable years beginning after December 31, 2022. Tentative minimum tax is determined by applying a 15% tax rate to the adjusted financial statement income of the corporation, after taking into account the AMT foreign tax credit and financial statement net operating losses. General business credits also can offset the tax, and financial statement income can be reduced by tax depreciation, which benefits corporations in years in which tax depreciation is higher than book depreciation.
The notice does the following:
- Clarifies which corporations the tax applies to and addresses troubled corporations, affiliated groups that file a return and situations where certain partnerships are involved.
- Explains how to determine whether a corporation is subject to the minimum tax when it participates in “covered transactions” such as mergers, reorganizations, split-offs and spin-offs. Rules also are provided for evaluating the applicability of the tax to corporations that are partners in a partnership.
- Establishes that a consolidated group of corporations will be treated as a single entity when calculating AFS income. The notice also explains how to treat cancellation of indebtedness income excluded for tax purposes.
- Explains how the minimum tax is calculated, including how deductible tax depreciation and tax credits are taken into account. In general, tax depreciation will be used to calculate AFS, and credits will be excluded from AFS income.
- Gives smaller corporations a simplified, safe harbor method for determining whether the new minimum tax applies to them.
Excise Tax on Stock Buybacks
New code section 4501 imposes a 1% excise tax on the aggregate fair market value of stock repurchased by publicly-traded corporations during the year, effective January 1, 2023. The amount of repurchases subject to tax is reduced by the value of any new issuance to the public and stock issued to the employees—the “netting rule.”
The excise tax does not apply:
- if the total value of stock repurchased during tax year does not exceed $1 million.
- to tax-free reorganizations
- if repurchased stock or its value is contributed to an employer-sponsored retirement plan, employee stock ownership plan, or similar plan.
- if repurchase is by dealer in securities in the ordinary course of business
- to repurchases by a RIC or REIT
- to the extent the repurchase is treated as a dividend
Notice 2023-2 describes rules and procedures that the IRS will include in future proposed regulations, including:
- The definition of a repurchase as a “redemption” or an “economically similar transaction.”
- A list of transactions that are repurchases, including acquisitive reorganizations, recapitalizations, split0offs, an F reorganization mere change in form and some complete liquidations.
- A list of transactions that are excluded from repurchase treatment.
- How to determine the fair market value of stock repurchased starting with market value for stocks traded on an established securities market.
- A transition period for the netting rule that allows corporations to take into account stock issuances for the entire tax year for corporations whose tax year begins before January 1, 2023 and ends after December 31, 2022.
- Rules for reporting and paying any liability for the excise tax. It is reported on Form 7208, Excise Tax on Repurchase of Corporate Stock.
- Applicability dates for the forthcoming proposed regulations
Public Comments Requested
The IRS has requested public comments on the notices, to be submitted within 60 days of their release on the Regulations.gov website.