You may have heard that President Biden recently signed the Inflation Reduction Act of 2022, a sweeping piece of legislation that is designed to address some of the significant issues that the U.S. is facing.
Some of those issues include the high cost of prescription drugs, healthcare availability, climate change, and, yes, hopefully inflation. Proponents of the new law say that its various provisions for fighting climate change, supporting clean energy production, and raising tax revenue, will reduce the deficit and in turn, combat inflation. And some of the expanded tax credits in the legislation could impact you.
The Inflation Reduction Act of 2022 will make a historic down payment on deficit reduction to fight inflation, invest in domestic energy production and manufacturing, and reduce carbon emissions by roughly 40 percent by 2030.
Here are the big provisions:
- Creation of a 15% corporate minimum tax rate: Corporations with at least $1 billion in income will have a new tax rate of 15%. Undoubtedly, these increases would eventually be passed along to American consumers in the form of higher prices. Stock by corporations will face a 1% excise tax. It’s relatively good news for most, the Inflation Reduction Act is not designed to increase taxes on small businesses or on families that make $400,000 or less. However, the actual tax effect remains to be seen.
- Increase of small business tax credit: The Inflation Reduction Act doubles the refundable research and development tax credit for small businesses, raising it from $250,000 to $500,000. The credit can be applied against payroll taxes and a wide variety of expenses, including product development and technology.
- Prescription drug price reform: Medicare can negotiate the price of certain prescription drugs, bringing down the price beneficiaries will pay for their medications. Medicare recipients will have a $2,000 cap on annual out-of-pocket prescription drug costs, starting in 2025. Lower healthcare costs are a win, as well, for most, for both families and small businesses. (1)
- IRS tax enforcement: The IRS that has been short-staffed for years will get a boost. The bill invests $80 billion in the nation’s tax agency over the next 10 years. For businesses, the investment is expected to enhance the IRS’s lagging technological capabilities, which could help the agency close the tax gap as it ramps up enforcement. Experts say that it will increase audits as well. Businesses should get proactive by hanging onto documents beyond their traditional tax forms, meet tax deadlines, and be careful and accurate on all tax documents. Businesses need to be able to reconcile between the amount that’s reported versus what they’re actually reporting as income on their tax return. (2)
- Affordable Care Act (ACA) subsidy extension: Currently, medical insurance premiums under the ACA are subsidized by the federal government to lower premiums. These subsidies, which were scheduled to expire at the end of this year, will be extended through 2025 to Americans without health coverage. If you are a sole proprietor getting your health insurance from the Affordable Care Act marketplace or have employees who use it, health care costs can decrease up to $800 per year. However, some studies suggest that Congress should allow the expanded ObamaCare subsidies to expire on time, which are currently costing billions of dollars each year in deficit spending.
- Energy security and climate change investments: The bill includes numerous investments in climate protection, including tax credits for those who invest in green technologies to offset energy costs, investments in clean energy production and tax credits aimed at reducing carbon emissions.
The Inflation Reduction Act also contains provisions for electric vehicle tax credits. Existing tax credits for buying a new or used electric vehicle are extended for 10 years—until December 2032. To encourage more people to buy environmentally friendly electric vehicles, the Inflation Reduction Act allows a tax credit of $7,500 for the purchase of some vehicles, starting next year. A big qualifier is that the vehicles must be assembled in North America, which rules out many models.3
The act could create new opportunities for businesses in the environmental sector—such as making and servicing solar panels and wind turbines, retrofitting buildings with energy efficient windows, doors and HVAC units, or other made in America green energy initiatives. Small businesses can also receive a tax credit that covers 30% of the cost of switching over to low-cost solar power – lowering operating costs. (4)
For now, we see some pros and cons to the newly passed Inflation Reduction Act. These are just some highlights of what the bill intends to do for Americans and business owners. The long-term impacts are up for debate. However, there are still opportunities and some actions we can all take from this new legislation. If you have additional questions, or concerned about how inflation and this new Act may impact your business and your taxes, contact the experts at Jeanine Hemingway, CPA.
1. USA Today. Inflation Reduction Act: How it impacts small businesses.
2. Inc: Inflation Reduction Act Taxes Changes
3. McCall: Inflation Reduction Act
4. Small Business Administration: How the Inflation Reduction Act Can Help Small Businesses and All of Us!