“Inflation Reduction Act:” Tax Provisions and Your Business

By SBE Council at 19 August, 2022, 10:10 am

By Barbara Weltman –

The $739 billion tax and spending package called the “Inflation Reduction Act of 2022” was signed by President Biden on August 17. The package funds clean energy projects and some health care, and aims to lower the deficit and stem inflation. It contains a number of tax increases impacting U.S. businesses and the Internal Revenue Service (IRS) gets a massive infusion on new funds.

The major revenue raiser – a 15% alternative minimum tax on C corporations – only applies to businesses with book income of $1 billion or more. In addition, there is a 1% excise tax on stock repurchases by publicly-traded domestic corporations. There are several changes that may affect taxes for small businesses for 2022 and planning for 2023 and beyond. And, of course, small businesses are impacted by how the overall measure affects the economy.

Impact on small business of the 15% corporate minimum tax

While small businesses won’t directly pay for this new minimum tax that begins in 2023 – only about 200 companies are projected to be affected – small businesses may be indirectly impacted if companies cut back on their purchases. The larger corporations paying the tax could mean that reduced after-tax profits translates into higher prices for consumers as well as fewer contracting opportunities for small business suppliers. It may be too early to know the full extent of the indirect impact of the new 15% minimum tax, but it won’t go unnoticed in the economy and by workers.

Extension of loss limitation for two additional years

Another way that spending is being paid for in the package is through an extension of the noncorporate loss limitation for two more years. This revenue raiser had originally been set to expire at the end of 2025, but was extended for one year by the American Rescue Plan Act last year. Now, as a result of the legislation, what amounts to a penalty on small business owners who companies lose money is extended through 2028. This is particularly troubling because the 20% qualified business income deduction for owners of pass-throughs was not extended; it expires in 2025.

1% excise tax on stock buybacks

As noted by SBE Council chief economist Ray Keating in a blog post on the “Inflation Reduction Act,” this measure “works against the efficient allocation of capital,” which would have a negative effect on startups and small businesses. Returning dollars to shareholders basically frees up new capital that can be invested in other productive ways, including in innovative small businesses or startups. This new excise tax disincentives this activity, and therefore restrains the availability of capital. According to Keating, “both a corporate minimum tax and a tax on stock buybacks would have negative effects on stock market investments, including the retirement plans, such as 401(k)s, of average Americans, again, including small business owners.”

IRS funding boost

A big part of the law is $80 billion in new funding for the IRS. The purported aim is to help the IRS close the “tax gap,” which is the spread between what the IRS thinks it should collect and what it actually collects. The tax gap estimate is wide-ranging, with an IRS estimate going as high as $1 trillion. In previous reports, the IRS blamed a good part of the tax gap on some self-employed individuals who didn’t report income, overstated deductions, and didn’t pay self-employment tax. While Treasury Secretary Yellen stated in an August 12, 2022, letter that the audit levels won’t increase for low-income earners and small businesses, this seems dubious. And as a side note, the U.S. tax gap is low by international standards, and we have one of the best tax compliance rates in the world.

The bottom line is that the new funding is largely aimed to help the IRS in its collection efforts, as that is what it is targeted to do, which means small business owners should be extra cautious going forward to minimize their audit exposure to the extent possible.

What was not included in the new law

There had been discussions about expanding the net investment income tax to apply to income from pass-through entities of owners even if they materially participated in the business. This was dropped at the last minute. In addition, another item that was “fixed” but was a surprise to many was how a $35 billion book minimum tax measure would have directly targeted small businesses. The language originally read that any business with private equity in its capital structure would be considered a subsidiary of that firm and thus subject to the 15% book tax. Thousands of small to mid-size businesses would have been swept up by this language. An amendment fixed this language, but the “loss in tax revenue” that was being used to pay for part of the package was made up through the two-year extension on loss limitations.

The new law did not include some items that businesses wanted. For example, many had hoped that the rule allowing for an election to immediately deduct R&D costs, instead of having to amortize them over 5 years, would be reinstated; it wasn’t. This provision could be tied to some “extender” legislation in the future.

Tax changes for small businesses

Here are some of the key tax changes for small business owners to note:

Clean vehicle credit. The new law overhauls the tax credit for purchasing a “clean vehicle.” Beginning in 2023, the credit applies to a qualified new electric vehicle, plug-in hybrid vehicle, and a hydrogen fuel vehicle. There’s a cap on the purchase price: $80,000 for new SUVs, vans, and pickup trucks, and $55,000 other new vehicles, such as sedans. And there’s a new rule, effective August 16, 2022, which allows the credit to be claimed only for vehicles meeting a “final assembly requirement”. The Department of Energy has a list of vehicles that may qualify and there’s a VIN decoder to check a specific model. .

But starting in 2023, even assuming a vehicle qualifies for the credit, buyers can only claim it if their income is below a new limit—modified adjusted gross income in the current or preceding year not exceeding $300,000 for joint filers, $225,000 for heads of households, or $150,000 for singles. The 200,000 cap on manufacturer’s vehicles is eliminated, so GM, Tesla, and Toyota vehicles may qualify next year, but only for their vehicles valued below the limits listed above.

There’s a new credit for buying a pre-owned clean vehicle. This credit also has a cap on vehicle prices and income limits for eligible purchasers.

Tax credit for commercial clean vehicles. A new credit for commercial clean vehicles, such as school buses, of up to $7,500 for those weighing less than 14,000 pounds and $40,000 for heavier commercial clean vehicles.

Deduction for energy-efficient commercial buildings. The new law makes modifications of the deduction for energy-efficient commercial buildings after 2022. The deduction will be the product of the applicable dollar value and the building’s square footage. The applicable dollar value is amount equal to $0.50 increased (but not above $1.00) by $0.02 for each percentage point by which the total annual energy and power costs for the building are certified to be reduced by a percentage greater than 25%; no partial deduction will be allowed. And there’s an increased deduction for certain property. The reference standard for this will be the more recent of the Standard 90.1-2007 published by the 5 American Society of Heating, Refrigerating, and Air Conditioning Engineers and the Illuminating Engineering Society of North America or guidance from the Department of Energy.

Extension of the tax credit for alternative fuel refueling property. The alternative fuel refueling property tax credit is extended through 2032. It had expired at the end of 2021. Qualified property includes recharging stations. The credit is up to 30% of the first $100,000, and 20% for amounts over $100,000. Businesses may elect to claim a direct payment in lieu of the credit, but there’s a penalty if a larger direct payment is received than the amount of the credit to which the businesses were entitled.

Credit for building energy-efficient homes. Contractors may claim a tax credit for building energy-efficient homes. The credit had expired at the end of 2021; it now applies for 2022 through 2032.

Energy investment credit. Businesses that invest in renewable properties, usually solar energy, can take a tax credit. The amount of the credit, which may be up to 30%, depends on the eligible technology. The new law extends the credit through 2024, but adds workforce and wage requirements. After 2024, a permanent 10% investment credit for solar energy technology continues to apply.

Research credit. The amount of the tax credit for increasing research activities hasn’t changed, but the new law doubles the amount of the credit that can be used to offset payroll taxes. This favorable rule change applies beginning in 2023, with a limit of $500,000.

Takeaways

Despite the title of the new law, it’s not certain whether and to what extent the changes will reduce inflation. In fact, the Congressional Budget Office reported that it will have “a negligible” effect on reducing inflation. We’ll have to wait and see.

We can expect to see more intrusion by the Department of Energy and Department of Labor in how businesses operate, because both must issue guidance on eligibility for certain tax breaks. What small business owners can do now is meet with CPAs or other tax advisers to determine which provisions may impact their businesses and plan accordingly.

Barbara Weltman is a member of SBE Council’s advisory board, and has been a leading consultant for small businesses of every kind for over twenty years. She’s the founder of Big Ideas for Small Business® and has written numerous books on small business operations, including J.K. Lasser’s Small Business Taxes, Complete Idiot’s Guide to Starting a Home-Based Business, and The Rational Guide to Building Small Business Credit. Follow Barbara on Twitter @BigIdeas4SB.