Welcome Changes in Stock Buyback Excise Tax Rules

On Nov. 24, the U.S. Department of the Treasury and the IRS released final regulations under IRC Section 4501 providing guidance on the 1% excise tax on certain corporate stock repurchases. The final regulations revise several key components of the April 2024 proposed regulations, resulting in significantly narrower and more administrable rules.

Generally, these rules apply to repurchase transactions that occurred after Dec. 31, 2022, the effective date of Section 4501. However, certain provisions only apply to repurchases after April 12, 2024, the date that the proposed regulations were issued.

Background

Section 4501, enacted by the Inflation Reduction Act of 2022, imposes a 1% excise tax on the fair market value of repurchased stock reduced by the value of stock issued during the same taxable year (the netting rule). The tax primarily affects U.S. publicly traded corporations but also can affect foreign-parented groups with specified U.S. affiliates.

Earlier implementation guidance included:

• Announcement 2023-18, which deferred reporting and payment obligations
• Notice 2023-2, which provided initial interim rules and continued the delay in reporting and payment obligations
• April 2024 proposed regulations, which introduced detailed computational rules and the controversial funding rule
• Final procedural regulations published on July 3, 2024, which addressed reporting and payment mechanics (Form 720, “Quarterly Federal Excise Tax Return,” and Form 7208, “Excise Tax on Repurchase of Corporate Stock”)

Crowe observation

The final regulations released in November 2025 complete the regulatory framework by finalizing the substantive computational rules.

2025 final regulations

The final regulations scale back several provisions in the proposed regulations that raised concerns. Following are key aspects of the changes implemented by the final regulations.

Removes the funding rule. The proposed regulations included a funding rule that would have treated a foreign-parent stock repurchase as subject to the excise tax if a U.S. affiliate provided funding with a principal purpose of avoiding the tax – an expansive anti-abuse concept. The final regulations do not adopt the funding rule, removing a broad, uncertain trigger for the excise tax for foreign-parented groups and eliminating potential excise tax exposure based solely on intercompany financing or cash movement patterns.

Limits application of the excise tax to certain M&A transactions. The proposed regulations treated many acquisitive reorganizations, going private transactions, and leveraged buyouts as economically similar to repurchases for Section 4501 purposes, often capturing common deal structures in the excise tax base even when a redemption was not the focus of the transaction. The final regulations exclude most acquisitive reorganizations, leveraged buyouts, going private transactions, and all complete liquidations from excise tax applicability, with narrow exceptions for certain split-off transactions. This change eliminates excise tax exposure on standard M&A transactions and significantly narrows the circumstances in which deal consideration can be treated as a repurchase for Section 4501 purposes.

Narrows stock definition. Under Notice 2023-2 and the April 2024 proposed regulations, many types of preferred and hybrid securities – including Section 1504(a)(4) preferred stock (often referred to as plain vanilla preferred stock) and certain additional tier 1 (AT1) preferred stock (a type of regulatory capital instrument issued by banks and insurance companies to meet capital adequacy requirements ) – were potentially treated as stock for purposes of Section 4501, creating uncertainty for financial institutions and funds. The final regulations exclude Section 1504(a)(4) preferred stock and clarify the treatment of AT1 preferred stock issued by regulated financial institutions.

Crowe observation

Corporations, including financial institutions, frequently issue instruments with the characteristics included in the proposed regulations. Excluding such stock from the Section 4501 base in final regulations removes uncertainty around routine preferred-stock redemptions.

In addition, the final regulations except from the excise tax stock issued prior to Aug. 16, 2022, if, at the time the stock was issued and continuing until the time the stock was redeemed, it was subject to mandatory redemption by the covered corporation or a unilateral put option by the holder of such stock.

Reduces documentation requirements. The proposed regulations required formal shareholder certifications to support application of the dividend exception to the excise tax, creating administrative challenges for issuers and limiting their ability to rely on existing corporate records. The final regulations retain the dividend exception to the tax but allow issuers to rely more heavily on internal information, with an optional shareholder certification safe harbor rather than a mandatory requirement.

Crowe observation

Removing the mandatory certification requirement reduces administrative burden, lowers compliance costs, and increases the availability of the dividend exception in practice.

Looking ahead

The final regulations significantly narrow the excise tax base and remove several sources of uncertainty that previously complicated application of Section 4501. Because Section 4501 can be applied to repurchases completed after Dec. 31, 2022, the final regulations could affect 2023-2025 closed transactions. Taxpayers that modeled or reported excise tax under earlier guidance might find that certain repurchases and M&A transactions no longer are within the excise tax base, creating potential refund opportunities.

The final regulations also provide a more workable framework for applying Section 4501 prospectively, particularly in the context of repurchase planning, M&A activity, and internal tracking systems and documentation practices.