Executives Will Soon Factor in Buyback Tax on Capital Management Decisions

The 1% tax on stock buybacks included in the final Inflation Reduction Act may be a nominal amount, but it may be a contributing factor when it comes to mergers and acquisition (M&A) deals. Partner Bob Lickwar said banks could choose to engage in M&A over buying back stock to avoid the tax, although the specifics of the deal may make the difference negligible.

"I think a lot of it has to do with the economics of the deal," he said. "So, you're going to find situations where repurchases may very well be the only viable option, so I wouldn't rule repurchases out altogether. I think you'll see more of a move towards mergers and acquisitions."

Lickwar also noted certain stock acquisitions will be treated as repurchases under the new law, potentially impacting a cash consideration M&A deal, a special purpose acquisition company (SPAC) or a spinoff. However, he anticipates the IRS will issue a “safe harbor” notification before the end of the year to clarify these situations and where the tax would apply.

Read the full article published by S&P Global.