The Inflation Reduction Act will affect corporations more than small businesses in most cases. If you provide an ACA health plan or are in the energy industry, you may be eligible for tax credits.
Here's what you need to know:
- The Inflation Reduction Act was signed into law and is set to invest $750 million into tax, healthcare, and clean energy initiatives
- Businesses generating hundreds of millions in net income are most likely to feel its effects regarding increased taxes
- However, small businesses and startups in the green energy space can leverage R&D subsidies
- Most businesses may remain completely unaffected unless they offer Affordable Care Act (ACA) health insurance
- It’s best to review your healthcare plan options to ensure that you comply with healthcare and energy regulations
In August 2022, the Inflation Reduction Act was signed into law and is set to invest $750 million into tax, healthcare, and clean energy initiatives.
Businesses generating hundreds of millions in net income are most likely to feel its effects regarding increased taxes. But small businesses and startups in the green energy space can leverage R&D subsidies.
Most businesses may remain completely unaffected unless they offer Affordable Care Act (ACA) health insurance.
In this overview, we’ll summarize the effects of the Inflation Reduction Act across the board.
What exactly is the Inflation Reduction Act?
Biden’s Inflation Reduction Act is a bundle of new policy measures meant to both limit rising inflation and support green initiatives. Senate Democrats believe that this $430 billion package will generate $737 billion in revenue over a decade.
But what does this mean for small businesses?
Will your business taxes go up?
Most businesses won’t see a significant change in their tax bracket. If you earn less than $400,000 in revenue annually, your taxes shouldn’t increase.
In 2023, corporations with a net income of $1 billion or more over 3 years will be required to pay a 15% alternative minimum tax (AMT). There are some exceptions. For example, if the company faces a change of ownership.
Companies that meet the net income threshold but are less than 3 years old may still be required to pay the AMT. To adjust the net income for a period of less than 1 year:
Adjusted financial statement = [income over a period] x 12 / the number of months in that period.
For example, if you make $500,000 over 5 months after starting your business, your adjusted net income would be:
$500,000 x 12 / 5 = $1,200,000.
If this is the case, you wouldn’t need to worry about AMT.
In addition to the AMT, public companies will face a 1% tax on stock repurchases in orders worth more than $1 million. This particular rule has ignited some controversy. After all, stock repurchasing isn’t always a negative thing. Buybacks can increase share prices and improve support during a recession.
So why make repurchasing less attractive for companies as a financial strategy?
Most likely the Senate wants to limit the negative impact of some backpack strategies — namely price bumping and artificially inflated financial results.
Either way, if stock repurchasing has been on the table, it may be best to review how tenable this strategy will be in light of the new excise tax.
Will my business get audited by the IRS?
The IRS has been granted $80 billion to hire much-needed staff and enforce tax law, in particular, to catch tax evaders in higher income brackets. The intention is to go after massive corporations, but anyone with significant discrepancies in their tax records could face an audit.
This could be good news for the economy. Currently, the IRS estimates a tax gap of around $540 billion every year. Improved enforcement could translate into a lower national deficit and greater funding for business-related subsidies.
That said, it’s still possible that your business could be audited at any time, regardless of your business size. That’s why it’s essential to keep all of your filing records in order.
Changes to health insurance
Until 2026, Medicare will be able to negotiate drug prices better. But it will also extend ACA subsidies created with the American Rescue Plan Act. You can continue using the premium tax credit (PTC) to lower ACA contribution premiums for mid-level plans.
But the Inflation Reduction Act could also help older entrepreneurs with healthcare costs. Owners over the age of 55 make up 50% of small businesses in the U.S. But seniors also face higher healthcare costs.
Under the Inflation Reduction Act, all seniors, including small business owners, would benefit from:
- A prescription drug cost cap at $2,000 per year
- An insulin cap at $35 per month
- Additional free vaccines for Medicare beneficiaries
Positive developments: tax credits
Startups and small businesses investing in research and development can get up to $250,000 as a Medicare tax credit for their payroll taxes. You must be in business for at least 5 years and make less than $5 million in revenue to be eligible.
Companies in the sustainability sector can take advantage of another tax credit. If your business produces clean hydrogen, wind, solar, or nuclear power, or captures carbon, you may be eligible for either extended or new tax credits.
In addition, there are requirements and tax benefits for manufacturing organizations that locally source batteries, solar, and wind parts. The manufacturing clause extends to companies that develop technologies like carbon capture systems and electrolyzers to make hydrogen.
But it’s not just energy companies that benefit.
Small businesses can receive a tax credit that covers 30% of the cost of switching to solar power energy sources. They can also claim $5 per square foot for energy efficiency upgrades.
There is also a $7,500 tax credit for businesses that invest in a “qualified commercial clean vehicle” until December 31, 2032.
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Will the Inflation Reduction Act hurt my business?
Unless you are in the energy industry, it’s unlikely you will be affected by the new law. Most of the new provisions relate to larger corporations or businesses earning millions in revenue. Currently, 86% of all U.S. small businesses generate less than $100,000 in income.
Organizations that particularly benefit are energy-related research, development, and domestic manufacturing facilities. These companies can leverage additional tax credits to build up the U.S. supply chain and create better clean energy solutions.
But if small businesses aren’t paying more and can’t leverage the tax credits, does the Inflation Reduction Act matter?
The answer is yes — because there are still some clauses that benefit small and mid-sized businesses directly.
There are still some clauses that benefit small and mid-sized businesses directly.
The biggest changes for most businesses could come from the ACA subsidies and ensuring compliance. It’s best to review your healthcare plan options to ensure that you comply with healthcare and energy regulations.
Not every business will be able to leverage the clean energy tax credits. However, if you have the money to spend on shifting to renewable energy sources, these opportunities may ease the financial burden.
With a potential recession looming, deciding to bite the bullet for an environmentally-friendly workplace could add many other benefits, including employee trust, brand awareness, and lower long-term utility costs.
And since these policies are meant to stretch into 2026, there is time to decide whether or not you can afford and implement these changes.
Changing your power source or healthcare plan is a big decision, even with a tax credit reducing the risk. But you’ll need time to run the numbers and understand whether or not now is the right time to make the change.
It’s vital to keep payroll organized for your business
Whether you get audited, whether your business is eligible for tax credits, or whether you’ll need to save for additional tax payments, payroll is a key component of IRS compliance. Yet around 40% of small and mid-sized businesses end up filing payroll records incorrectly — and paying penalties.
To streamline your payroll reporting, check out our free payroll template bundle.