1% Stock Buyback Excise Tax: Who Owes It, Exceptions, Penalties

The 1% stock buyback excise tax is a federal levy that publicly traded U.S. corporations owe directly on the net value of shares they repurchase during their tax year. Enacted as part of the Inflation Reduction Act, it applies to repurchases made after December 31, 2022, and equals 1% of the fair market value of all stock a covered corporation buys back, minus statutory exceptions and the value of new shares issued that same year.¹ The shorthand “1% withholding tax” is misleading. Nothing is withheld from a payment to someone else; the corporation owes the tax itself as an excise.

Which Corporations Owe It

A “covered corporation” is any domestic corporation whose stock trades on an established securities market. There is no revenue floor and no market-cap threshold. If your company is incorporated in the United States and its shares trade on the NYSE, Nasdaq, or another recognized exchange, any buyback program you run can trigger the tax.¹

Purchases made by a “specified affiliate” also count. A specified affiliate is any entity the covered corporation controls through more than 50% ownership by vote or value, or through more than 50% of capital or profits interests in the case of a partnership. When a subsidiary buys parent shares from an outside seller, the transaction is treated as though the parent repurchased its own stock. Companies with layered subsidiary structures need to track affiliate-level acquisitions carefully, because a purchase that looks routine at the subsidiary level can create excise tax liability up top.¹

Regulated investment companies, real estate investment trusts, and certain open-end funds registered under the Investment Company Act are excluded from the definition of covered corporation, even when their shares trade publicly.²

How the Tax Is Calculated

Start with the total fair market value of all stock the corporation repurchased during its tax year. Fair market value is the market price on the date of repurchase, which for a standard trade is the trade date, not the settlement date. From that total, subtract two things: repurchases that fall under a statutory exception, and the value of new stock the corporation issued during the same tax year. Multiply the remainder by 1%.²

A worked example. Say a corporation repurchases $500 million worth of stock during 2025, qualifies for $20 million in exceptions, and issues $150 million in new shares to employees and the public. The excise tax base is $500 million minus $20 million minus $150 million, or $330 million. The tax owed is 1% of that base: $3.3 million.³

One threshold matters before you reach any of the netting steps. If total gross repurchases for the year are $1 million or less, the excise tax does not apply at all. The $1 million test is measured before subtracting exceptions or stock issuances.⁴

Exceptions That Reduce the Base

The statute lists six categories of repurchases that do not count:

Repurchases that are part of a tax-free reorganization under Section 368(a) where the shareholder recognizes no gain or loss.
Stock, or an equivalent value of stock, contributed to an employee pension plan, ESOP, or similar arrangement.
Total repurchases of $1 million or less during the tax year (the de minimis rule).
Repurchases by a dealer in securities acting in the ordinary course of business.
Any repurchase by a regulated investment company or REIT.
Repurchases treated as dividends for federal income tax purposes.

The final Treasury regulations added further exclusions beyond the statutory list. Complete liquidations, acquisitive reorganizations, and “take private” transactions are excluded. The regulations also exempt repurchases of “plain vanilla” preferred stock described in Section 1504(a)(4).²

The Netting Rule for Stock Issuances

After subtracting exceptions, the corporation further reduces its tax base by the fair market value of any stock it issued during the same tax year. That includes shares sold to the public, shares issued through equity compensation, and shares issued to non-employee service providers like consultants. For most companies, this netting rule is the single biggest lever available to manage excise tax liability.²

Timing details matter. Restricted stock counts as issued when it vests, unless the employee elected to include it in income at the grant date. Stock options count as issued when the option is exercised. Shares withheld to cover the exercise price of an option or to satisfy tax withholding do not count as issued for netting purposes, so those withheld shares shrink the offset. A corporation whose employees routinely do net-share settlements will get a smaller netting benefit than one where employees pay cash for the exercise price.⁴

Newly issued shares and treasury shares are treated the same way under the netting rule. Fair market value of each issued share is measured at the market price on the date ownership transfers for federal income tax purposes.²

Filing Form 7208 and Form 720

Every covered corporation must file Form 7208 annually, even if total repurchases fall below the $1 million threshold. The form attaches to the corporation’s Form 720 (Quarterly Federal Excise Tax Return) for the first full quarter after the close of its tax year.³

For a calendar-year corporation, the form is due with the first-quarter Form 720 by April 30 of the following year. Other fiscal year-ends shift the deadline:

Tax year ends January through March: due July 31 of the same year.
Tax year ends April through June: due October 31 of the same year.
Tax year ends July through September: due January 31 of the following year.
Tax year ends October through December: due April 30 of the following year.

Form 7208 walks through the calculation in five parts. Part I tallies total repurchases; if the total is $1 million or less, you complete Part I and attach the form with no tax due. If repurchases exceed $1 million, Parts II through IV subtract exceptions, retirement plan contributions, and stock issuances. Part V multiplies the remaining base by 1% to arrive at the excise tax owed, which gets reported on Form 720 under IRS number 150.³

One detail catches companies off guard: the excise tax is not deductible. The Inflation Reduction Act amended Section 275 of the Internal Revenue Code to add this tax to the list of non-deductible taxes, so the 1% hit is a true after-tax cost.¹

Penalties for Late Filing

Missing the Form 720 deadline triggers the standard failure-to-file penalty: 5% of the unpaid tax for each month or partial month the return is late, up to a 25% maximum.⁵ If the IRS determines the failure was fraudulent, the penalty jumps to 15% per month, capped at 75%. Interest accrues on any unpaid amount from the original due date until it is paid in full.

For a corporation with a $3.3 million excise tax liability, a four-month filing delay would generate roughly $660,000 in penalties before interest. Building the Form 7208 calculation into your year-end close process is worth the effort.

SPACs and Foreign Surrogates

Special purpose acquisition companies were pulled in almost immediately. When a SPAC redeems shares as part of a de-SPAC transaction, those redemptions are repurchases under Section 4501. Stakeholders asked Treasury for transition relief for SPACs formed before enactment, arguing that redemption rights were baked into their governing documents. Treasury declined, noting that the statute contains no binding-commitment exception and applies to all repurchases after December 31, 2022.²

A separate provision extends the tax to “covered surrogate foreign corporations,” which are foreign companies that became surrogates of U.S. corporations through inversion transactions after September 20, 2021, and whose stock trades on an established securities market. This rule targets companies that might otherwise avoid the excise tax by redomiciling abroad.

Not to Be Confused With Backup Withholding

Searches for a “1% withholding tax” sometimes land people on backup withholding, which is a different mechanism entirely. Backup withholding is not 1%. The current rate is 24%, and it applies when a payee fails to provide a correct taxpayer identification number, when the IRS notifies the payer that the TIN is wrong, or when the payee has a history of underreporting income.⁶ If you were looking for information about payments to contractors or vendors, that is the regime you want, not Section 4501.

The Rate May Not Stay at 1%

President Biden’s FY2024 budget proposed quadrupling the stock repurchase excise tax to 4%, and Senators Brown and Wyden introduced legislation to the same effect.⁴ The Joint Committee on Taxation originally estimated the 1% tax would raise $74 billion over the 2022–2031 budget window; a 4% rate would multiply that projection and change the cost-benefit math for buyback programs considerably. None of these proposals had been enacted as of early 2026, but corporations planning multi-year capital return strategies should factor in the possibility that the rate could increase.

1
Office of the Law Revision Counsel. 26 USC 4501 – Repurchase of Corporate Stock
2
Federal Register. Excise Tax on Repurchase of Corporate Stock
3
Internal Revenue Service. Instructions for Form 7208
4
Congress.gov. The 1% Excise Tax on Stock Repurchases (Buybacks)
5
Office of the Law Revision Counsel. 26 USC 6651 – Failure to File Tax Return or to Pay Tax
6
Office of the Law Revision Counsel. 26 USC 3406 – Backup Withholding