7.16 Excise Taxes Paid on Treasury Stock Transactions
The Inflation Reduction Act of 2022 adds a new Internal Revenue Code
section, Section 4501, that imposes a 1 percent excise tax on own-stock repurchases
by publicly traded companies that occur after December 31, 2022. Specifically, under
Section 4501, a covered corporation is subject to a tax equal to 1 percent of (1)
the fair market value of any stock of the corporation that is repurchased by this
corporation (or certain affiliates) during any taxable year, with limited
exceptions, less (2) the fair market value of any stock issued by the covered
corporation (or certain affiliates) during the taxable year (including compensatory
stock issuances). The 1 percent excise tax may also be imposed on acquisitions of
stock in certain mergers or acquisitions involving covered corporations.
Because the tax is not based on a measure of income, the excise tax
is not an income tax and, therefore, is not within the scope of ASC 740. The
accounting for taxes paid in connection with the repurchase of stock is not
specifically addressed in U.S. GAAP. However, AICPA Technical Q&As Section
4110.09 indicates that direct and incremental legal and accounting costs associated
with the acquisition of treasury stock may be added to the cost of the treasury
stock. Therefore, it is acceptable to account for the Section 4501 excise tax
obligation that results from the repurchase of common stock classified within
permanent equity as a cost of the treasury stock transaction. Any reductions in the
excise tax obligation associated with share issuances would also be recognized as
part of the original treasury stock transaction even if the share issuance is a
different type of instrument than the share that was repurchased.
Additional considerations are necessary when the excise tax obligation is related to
redemptions of preferred stock. Such an excise tax obligation would be recognized as
a cost of redeeming the preferred stock. The accounting for redemptions of preferred
stock differs depending on the classification of the preferred stock as permanent
equity, temporary equity, or a liability. An entity would need to use a systematic
and rational allocation approach to account for the effect of share issuances on the
excise tax obligation when the entity has repurchases of both common stock and
preferred stock during a taxable period.
ASC 230 does not specifically address the classification of cash outflows for payment
of the excise tax. Therefore, either of the following two classifications is
acceptable:
- Net cash paid for excise taxes is reported in operating activities. This classification is consistent with ASC 230-10-45-17(c), which indicates that “[c]ash payments to governments for taxes, duties, fines, and other fees or penalties” are cash outflows for operating activities.
- Net cash paid for excise taxes is reported in financing activities. This classification is
consistent with ASC 230-10-45-15(a), which states that cash outflows for
financing activities include: Payments of dividends or other distributions to owners, including outlays to reacquire the entity’s equity instruments. Cash paid to a tax authority by a grantor when withholding shares from a grantee’s award for tax-withholding purposes shall be considered an outlay to reacquire the entity’s equity instruments.
An entity should elect one of the two approaches as an accounting policy and report
the net cash paid for excise taxes in either operating or financing activities. An
entity is not permitted to report amounts in both operating activities and financing
activities.
Note that only actual cash payments for excise taxes will affect an entity’s
statement of cash flows. If an entity has recognized an excise tax payable, it
should report that transaction as a noncash financing activity if it elects to
report cash amounts paid within financing activities.