BLZE

What are the tax and regulatory considerations associated with the share repurchase for both the company and shareholders?

Created August 07, 2025 at 11:10 AM

Below is a comprehensive overview of the tax and regulatory issues that arise when Backblaze (NASDAQ: BLZE) carries out its newly‑approved $10 million share‑repurchase program. The points are organized for the two parties that are directly affected – the company itself and the shareholders (including the employees whose option‑exercises are funding the buy‑back).

1. Tax Considerations

Perspective	What the rule says	How it applies to Backblaze’s $10 M buy‑back
Company – corporate‑level tax	A share repurchase is not a deductible expense for U.S. federal income tax. The cash outflow reduces shareholders’ equity but does not generate a tax deduction (unlike a dividend, which is paid out of after‑tax earnings). The only possible tax effect is the capital‑loss carry‑forward that may arise if the repurchase price is higher than the corporation’s tax basis in its own stock (very rare).	The $10 M will be taken out of cash (which is already being generated by the business and by employee option exercises). It will not lower Backblaze’s taxable income for the year in which the shares are bought. The program will, however, affect the company’s adjusted free‑cash‑flow calculation – a metric the company is highlighting as turning positive in Q4 2025.
Company – payroll/employee‑related tax	When employees exercise non‑qualified stock options (NSOs) or sell shares under an employee‑stock‑purchase plan (ESPP), the compensation element is subject to ordinary‑income payroll taxes (FICA, FUTA, state payroll taxes). The company must withhold and remit those taxes.	The press release notes that the buy‑back will be funded “with cash from employee‑exercised stock options and purchases under the Employee Stock Purchase.” Consequently, Backblaze will already have incurred payroll‑tax withholding on that cash. The repurchase itself does not create any additional payroll tax.
Shareholder – capital‑gain vs. dividend treatment	The IRS treats a share‑repurchase as a sale of a capital asset. The shareholder’s adjusted basis in the shares sold is subtracted from the proceeds to determine capital gain or loss. The gain is short‑term if the shares were held ≤ 1 year, otherwise long‑term. No “dividend” tax applies (unless the buy‑back is deemed a constructive dividend under IRC 301‑c‑1, which is rare for open‑market repurchases).	Any Backblaze shareholder who elects to sell shares back to the company will receive cash proceeds that are taxed as a capital transaction. The holding period and basis will be the same as if the shares had been sold on the open market. The tax rate will be the shareholder’s applicable long‑ or short‑term capital‑gain rate.
Shareholder – basis & holding‑period adjustments	The basis of the remaining shares is unchanged; the repurchase does not allocate a portion of the purchase price to those shares. The shareholder’s holding period for the remaining shares continues unchanged.	After the buy‑back, each shareholder’s per‑share ownership percentage will be lower, but the cost basis per share of the stock they still own stays the same. There is no “step‑up” in basis.
Shareholder – foreign‑investor withholding	For non‑U.S. shareholders, the proceeds of a share‑sale are generally not subject to U.S. withholding (unlike dividends). However, the foreign shareholder may have local tax obligations.	Non‑U.S. Backblaze holders who participate in the repurchase will receive cash without U.S. withholding; they should check the tax treaty and local law for any reporting/ tax due.
Shareholder – potential “constructive dividend” risk	If a repurchase is price‑manipulated (e.g., the company pays a premium far above market price to a related party) the IRS may re‑characterize the excess as a dividend. This is rarely an issue for open‑market, Rule 10b‑18 compliant buy‑backs.	Backblaze’s program is being run on the open market (or via a broker‑dealer) and is expected to stay within safe‑harbor pricing limits, so the risk of constructive dividend treatment is minimal.
Shareholder – AMT considerations for employees	Employees who exercise incentive stock options (ISOs) and sell the shares back in the same year may have an adjustment for Alternative Minimum Tax (AMT) on the spread at exercise (if not a qualifying disposition).	Because the repurchase is funded partly by cash from option exercises, employees who exercised ISOs and then sold shares back to the company may need to track the ISO spread for AMT. The repurchase price will be the sale price for AMT purposes.

2. Regulatory Considerations

2.1. SEC Rules (U.S. public‑company framework)

Requirement	What it entails	How Backblaze must comply
Board authorization	A share‑repurchase program must be approved by the board of directors and disclosed to shareholders.	The press release confirms the Board authorized the program up to $10 M through Aug 1 2026.
Form 8‑K filing	Companies must file a current report (Form 8‑K) within four business days of a material event, such as the adoption of a buy‑back.	Backblaze will file an 8‑K (or an amendment to the one already released) detailing the program, the authorized amount, the purpose, and the funding source.
Periodic reporting	Repurchases must be disclosed in quarterly (Form 10‑Q) and annual (Form 10‑K) reports, including the number of shares repurchased, average price, and remaining authorized amount.	The company will add a “Share Repurchases” table to its next 10‑Q/10‑K, showing the cumulative repurchase activity up to the reporting date.
Rule 10b‑18 (Safe Harbor)	Provides a safe harbor from liability for market manipulation if the company follows three conditions when buying on the open market: (1) Timing (no purchases at the opening/closing of the market, and no purchases during the last 30 minutes before close), (2) Price (the purchase price is not greater than the highest independent bid or the last independent transaction price), and (3) Volume (the daily volume does not exceed 25 % of the average daily trading volume of the prior four weeks).	Backblaze’s buy‑back program will be conducted by its broker‑dealer in compliance with Rule 10b‑18, ensuring that the timing, price, and volume limits are observed to stay within the safe harbor.
Rule 144A / Reg S (if using private placements)	If the repurchase were done via a private transaction (e.g., a tender offer to insiders), it would have to satisfy resale‑restriction and filing rules.	The program is open‑market, so Rule 144A/Reg S do not apply; however, if a later tender offer is contemplated, the company would need to file a Schedule 13E‑3 and possibly a proxy statement.
NASDAQ Listing Requirements	Nasdaq requires listed companies to disclose share‑repurchase activity and maintain a minimum bid price and shareholder equity. Excessive buy‑backs that materially shrink equity could trigger a listing review.	A $10 M program is modest relative to Backblaze’s market cap, so it will not jeopardize Nasdaq compliance. The company will continue to monitor equity levels and share‑price compliance.
Insider‑trading restrictions	Officers, directors, and 10b5‑1 plan participants must ensure that any repurchase transactions are not executed while in possession of material non‑public information.	Backblaze’s insiders will be subject to its internal trading blackout windows and must file Forms 4/5 for any shares sold under the buy‑back program.
Anti‑manipulation (Section 9 of Exchange Act)	Any purchase that is intended to manipulate the market price (e.g., “pump‑and‑dump”) is prohibited.	By adhering to Rule 10b‑18 and disclosing the program, Backblaze mitigates any risk of manipulation claims.

2.2. State & Local Considerations

Issue	Typical rule	Relevance to Backblaze
State securities (Blue‑Sky) filings	Companies often must file notice of a share‑repurchase with the state securities regulator where the shares are listed (California, etc.).	Because Backblaze is incorporated in California, it may have to file a notice with the California Department of Business Oversight, but the filing is usually minimal for open‑market repurchases.
Transfer taxes	Some jurisdictions impose a stock transfer tax on the change of ownership.	Most U.S. states have no transfer tax on stock trades; the repurchase will not trigger additional state-level taxes.
Corporate franchise tax	The reduction in paid‑in capital can affect the state franchise tax base.	In California, franchise tax is based on net income (or a minimum), so a modest cash outflow for a buy‑back will not materially affect the tax liability.

2.3. Employee‑Stock‑Option & ESPP Specific Rules

Rule	What it means	Impact on Backblaze’s buy‑back
Section 409A (non‑qualified deferred compensation)	Determines the timing of taxation on stock‑option exercises and ESPP purchases.	The cash that funds the repurchase is post‑tax to the employees (they have already recognized any ordinary income at exercise).
Plan‑document limitations	Stock‑option and ESPP plans often contain restrictions on the use of proceeds (e.g., the company may not use the cash for distributions that would affect the plan).	Backblaze’s repurchase is a permitted corporate action; the company must ensure that the plan’s “use of proceeds” clause does not forbid using the cash for a buy‑back. Most plans allow it, especially when the cash is “excess” after covering obligations.
Disclosure to employees	Companies must disclose in the annual proxy or plan documents that cash from option exercises may be used for share repurchases.	The press release already signals that the buy‑back will be financed with such cash; the company should also update the Form DEF 14A (proxy) and the plan documents if needed.

3. Practical Take‑aways for Each Stakeholder

For Backblaze (the company)

Reporting & Filings – File a Form 8‑K now, disclose the program in the next 10‑Q/10‑K, and maintain daily compliance with Rule 10b‑18 (timing, price, volume).
Cash Management – The program is funded with cash from exercised employee options/ESPP purchases, so the outflow will not stress operating liquidity.
Tax Accounting – No corporate tax deduction; the repurchase will be reflected only as a reduction of equity (Treasury Stock) and an impact on earnings‑per‑share (EPS) and free‑cash‑flow metrics.
Governance – Ensure that the board’s authorization is documented in minutes and that any insider‑selling restrictions (blackout periods) are observed for insiders who may sell shares back.
Investor Communication – The buy‑back is a capital‑return tool. Communicate that it is not a dividend, emphasizing the expected EPS accretion and the company’s confidence in its cash generation (Adjusted Free Cash Flow turning positive in Q4 2025).

For Existing Shareholders

Tax Treatment – Treat any shares sold back as a capital transaction; calculate gain/loss using the original cost basis and holding period. Short‑term vs. long‑term rates will apply.
No Dividend‑Tax – Unlike a cash dividend, a buy‑back does not generate ordinary‑income tax on the remaining shares.
Basis Remains Unchanged – The cost basis of the shares you continue to hold is untouched; only the number of shares you own shrinks.
Potential AMT for Employees – If you are an employee who exercised ISOs and immediately sold the shares back, the spread at exercise may affect your AMT liability.
Foreign Shareholders – No U.S. withholding on the proceeds, but local tax rules still apply.

For Employees Exercising Options/Participating in ESPP

Ordinary‑Income Payroll Taxes – The cash you receive from exercising NSOs or selling ESPP shares is subject to withholding; the company will remit those taxes.
Capital‑Gain on Sale to Backblaze – When you sell the shares back, the difference between the sale price (the repurchase price) and your basis (exercise price + any compensation element) is a capital gain/loss.
AMT Considerations for ISOs – If the shares are sold back in the same year as exercise, you may have an AMT adjustment for the ISO spread.

4. Summary

Tax side: The repurchase is a capital‑sale for shareholders (taxed at capital‑gain rates) and a non‑deductible cash outflow for Backblaze. Employees who fund the program via option exercises will face ordinary‑income payroll taxes on the exercise; any subsequent sale to the company will generate capital‑gain tax consequences. No dividend treatment is expected unless the IRS re‑characterizes the transaction (unlikely under open‑market rules).
Regulatory side: Backblaze must comply with SEC Rule 10b‑18, file an 8‑K, disclose the activity in periodic reports, and stay within Nasdaq listing requirements. Insiders must obey blackout periods and filing obligations. State securities notices are minimal but may be required.
Operationally, the $10 M buy‑back is modest relative to the company’s market cap and is being financed by cash generated from employee stock‑option exercises and ESPP purchases, which does not affect the company’s operating cash flow or tax position beyond the normal payroll tax withholdings.

By observing the above tax and regulatory guidelines, Backblaze can execute its share‑repurchase program efficiently, and shareholders can anticipate the tax consequences of participating in the buy‑back.