Are you a small business owner who has been following the news of the Inflation Reduction Act, but still feeling confused? Maybe you are scrolling through all of the mixed messages across your Twitter and LinkedIn feeds warning of catastrophic inflation looming (insert industry expert say “do this” here). Well, small business owners out there, it is time to take a deep breath and let us enlighten you a bit. Take it from your accountant tax pro friends; this new law has the goal of easing increasing costs and investing into small business success, so chill.
Here are some key points to take home and see how, and if, this new law may affect your business.
Basic Law Stats
Inflation Reduction Act, signed into law on August 16, 2022.
Goal: To counteract inflation and promote sustainability by reducing operating costs for small businesses by providing increased tax benefits for investing in R&D and increasing use of renewable energy.
Key Tax Provisions
- Increase in R&D payroll credit.
- Extension and expansion of renewable energy credits.
- Lowers the cost of health insurance premiums.
- Extends the limitation on business losses for non-corporate taxpayers through 2028.
IRS Funding Increases Does Not Mean Guaranteed Audit
This may have been one of those scary factors that shaved off an hour or two of your precious entrepreneurial rest. We’ll open by saying this: the new 15% minimum tax only applies to corporations with income in excess of $1 billion. More than likely, you are a business with less than $5mil in gross receipts or part of a family making less than $400,000 per year. This means you are part of the 98% of small businesses, therefore benefiting from the IRS funding.
The law increases IRS funding by $80 billion over the next ten years to support more than just better enforcement. It supports better operations and modernization of its systems. Efficiency and process improvement are a good thing, and this is not an effort to target small businesses. It’s an effort to move out of the 70’s and into modern times.
Don’t believe us? Read the details from IRS Commissioner, Charles P Rettig, who stated,
“these resources are absolutely not about increasing audit scrutiny on small businesses or middle-income Americans.”
Increase in the Use of the Research and Development Tax Credit
Applies to: Eligible businesses are businesses with less than $5million in gross receipts in the credit year, and have had no gross receipts for five years or fewer.
This was an added bonus for companies benefiting from their R&D efforts, allowing for a total of $500,000 in R&D credits available. Previously, eligible businesses could elect to apply up to $250,000 per year of the R&D credit against their social security tax liability. The new law expands credit to allow for an additional $250,000 per year to be applied against the medicare payroll tax for tax years beginning after 2022.
Extension and Expansion of Renewable Energy Credits For Businesses (and Individuals)
Applies to: Eligible businesses are businesses and investors that purchase new or reconstructed depreciable property utilizing renewable energy. Individuals not exceeding the adjusted gross income threshold of $150,000 per year, or $300,000, filing jointly.
In other words, this applies to large purchases that support clean energy and lessen our carbon footprint to do business, like clean energy vehicles, energy-efficient retrofits, and converting to solar power for your warehouse.
If this sounds like you, you’re eligible for up to a 30% income tax credit. A number of new credits have been added for energy production from renewable sources, including the credit for qualified commercial clean energy vehicles. These credits can extend to the individual taxpayer and are worth mentioning.
For individuals making improvements at home,
the law increases the tax credit to 30% of qualified energy efficiency improvements plus the cost of any residential energy property costs. The lifetime maximum limitation has also been removed, and the credit now limited to $1,200 annually (lower annual limit for certain qualified improvements). The primary residence requirement to earn these credits was removed.
For individuals investing in electric vehicles,
The Qualified Plug-in Electric Vehicle Credit allows for some tax perks. Note, in order to qualify, you must not exceed the adjusted gross income threshold of $150,000 per year, or $300,000 for joint filers, and the final assembly of the vehicle must be in North America.
Under the new law, the manufacturer credit phase out, which phased out the credit as more sales of the qualified vehicle were made, has been eliminated for vehicles sold after December, 31, 2022, and there is now a credit for qualified used vehicles. New vehicle purchases allow for a $7,500 tax benefit, while used vehicles may be eligible for up to a $4,000 credit. Definitely enough worth considering adding an electric vehicle to the business fleet.
Extension of The Limitation on Excess Business Losses for Non-Corporate Taxpayers Through 2028
Applies to: Eligible businesses are individuals that are non-corporate taxpayers, i.e., reporting a loss on a Schedule C or from an S corporation or partnership that you are a shareholder or partner in.
Previously, non-corporate taxpayers were not eligible to report a business loss in excess of the thresholds below through 2026. That has been extended to 2028. Deductions for business losses can’t exceed $270,000 (for single filers) or $540,000 (for married spouses filing jointly).
Extension And Expansion Of The Premium Tax Credit For Health Insurance Purchased On A Qualified Exchange
Many small business owners find they are not yet in that realm of purchasing group plans, but still need quality coverage for themselves. For those who are going with a marketplace option, the news is good. You will likely benefit from lower rates and more accessibility than before.
Individuals purchasing health insurance on a qualified exchange are potentially eligible for the credit. Taxpayers with household income in excess of 400% of the federal poverty line remain eligible for the credit through 2025. Prior to 2021, taxpayers over this threshold were not eligible to claim the credit. We’ll save you the details of the math on this one, since it depends on location and family size. You can use this handy calculator to see how that applies in your specific state and household size. The key takeaway here is that there are savings available to a broader range of income levels.
What Is Not Part of The Law
A few key items were discussed at one point in the act, but are not in the final law. With so much info out in the world, it is with mentioning what is now NOT changed as a result of the new law.
These include the following:
- Changes to the “carried interest” rules for private equity fund managers.
- Changes to the corporate tax rate (remains 21%).
- Changes to the qualified small business stock gain exclusion.
How To Take Advantage of the New Benefits
If you’ve read this far, chances are you fall into the category of a qualifying individual or business. We recommend consulting your tax team for all of the details that apply to your specific situation, but it is important to take away one major thing; the new law helps the small business, so take advantage of its benefits. If you need some more information and tax support, we are just an email or chat away. Feel free to reach out to us to see how we can help your business in the coming months. After all, tax time will be here once again, and sooner than you think.