Question of the Week
Takeaways from the Inflation Reduction Act
You’ve likely heard a lot of talk about the Inflation Reduction ACT, which became law on August 16th, 2022. According to the White House, the Act will “lower costs for families, combat the climate crisis and reduce the deficit, and finally ask the largest corporations to pay their fair share.”
As with most new laws with financial consequences, I’ve dug into this one to summarize how it might affect you. Here’s what you need to know:
It will not increase taxes on the majority of Americans.
The White House and Congress have emphasized that the law is not designed to increase taxes on small businesses or families that make $400,000 or less. That’s some 98% of Americans. So, where is the additional revenue going to come from?
The law institutes a 15% corporate minimum tax on companies making more than $1B in revenue annually. Some corporations, like Amazon, pay very little in federal tax in comparison to its income. This new provision aims at about 150 corporations and should bring in more than $300 billion in tax revenue. In addition to the minimum tax, the law institutes a 1% excise tax on stock buybacks.
The good news for some larger corporations is that the law also doubles the refundable research and development tax credit for small businesses, from $250,000 to $500,000. Companies can apply for this credit against payroll taxes and a wide variety of expenses, including product development and technology.
More IRS funding
The Act also gives the IRS another $80 billion in additional funding. From what I’ve read, about $45 billion will improve tax enforcement, and another $25 billion will enhance IRS operations.
The IRS desperately needs this funding. They still use technology from the 1970s and are woefully behind on processing returns and keeping up with customer service.
Theoretically, more funding could also mean more audits. However, according to IRS Commissioner Charles Retting, “these resources are absolutely not about increasing audit scrutiny on small business or middle-income Americans.”
And for some additional perspective, in the fiscal year 2021, the IRS audited 659,003 (99,583 were in-person). While that sounds like a lot, the IRS received 167M individual tax returns. So that’s auditing .4% (yes, less than half a percent) of filed returns and only .06% of in-person audits.
Granted, that doesn’t do you much good if the IRS chooses your returns, so keep good books and records, especially for you S-Corps who need to determine reasonable compensation.
Extends Affordable Care Act Subsidies
For those getting insurance through the Marketplace, you’ll be happy to know that the law extends the subsidies which made health care more affordable to 2025. The subsidies extended under the American Rescue Plan were set to expire at the end of this year. According to the SBA, small businesses, their employees, and the self-employed disproportionally use the ACA exchanges.
Energy Tax Credits
Lastly, the other exciting part of the new law focuses on climate change and producing renewable energy. Some of the incentives are:
- $369 Billion in incentives for renewable energy, including electric vehicles.
- Homeowners Clean Energy Tax credits for those who install solar panels or purchase energy-efficient products like water, heaters, HVAC systems, and heat pumps
- Tax credits up to $7,500 for buying a new or used electric vehicle are extended until December 2032, set new limits on the vehicle price, household income, and North American assembly. Those limits do not apply to business vehicles.
Quote of the Week
“This law not only tackles inflation and powers America’s transition to safer, cleaner energy, it also shrinks the budget deficit and—most importantly—drives down health care and energy costs for small businesses and their employees. Lower costs mean small business owners and entrepreneurs can focus on doing what they do best, creating jobs, developing talent, innovating, and opening doors of growth and opportunity across all of our communities.” – SBA Administrator Isabella Guzman.
Task of the Week
If you’re curious, you can take time to acquaint yourself with the new law. You can read the summary of the Act here, and if you’re ambitious, you can read the entire Act here. I’ll keep you posted on any significant changes and effects coming your way.