While inflation is normal in a growing economy, in 2022 it hit its highest level in 40 years—and it tends to hit small businesses the hardest. In fact, a survey carried out by the U.S. Chamber of Commerce found that almost 85% of business owners were concerned about inflation affecting their small businesses, and close to 67% of small businesses had to increase their prices due to inflationary pressures.
To address this, the U.S. government passed the Inflation Reduction Act (IRA) of 2022. The act focuses on three main areas: taxes, healthcare, and climate. This article will go over the essentials of how this act impacts small businesses in the U.S, and the actions you can take to make the most of its potential benefits.
Minimum corporate income tax
One of the first, and perhaps the most significant, changes was the creation of a minimum corporate tax of 15% on businesses that bring in $1 billion or more in revenue in the last three years.
Now you might ask, how does this affect my small business? Small business owners pay an average federal tax rate of 19.8%, while larger corporations pay 6% or less in taxes with the help of tax loopholes. The creation of a minimum corporate tax will help level the playing field for small businesses by taxing the top 1%.
The IRA also allocates roughly $80 billion to the IRS over the next 10 years. According to a report by the Treasury Department, the funds will be used for a wide range of necessary administrative expenses such as rent payments, facilities services, printing, postage, physical security, funding research and statistics, telecommunications, and lastly some much-needed funding for the IT department.
The additional funding will modernize the IRS’ antiquated technology so that returns are processed more quickly and accurately. Not just that, the IRS also plans to use the funding to hire more tax support staff, which is good news for small business owners who are often left with unanswered questions from the IRS.
A portion of the funding will be used to hire specialized auditors, but these auditors will be mainly tasked with cracking down on corporations and high-net-worth tax evaders. If you’re concerned about the potential for increased tax scrutiny, it never hurts to spend some extra time ensuring your business’s financial details are accurate and up-to-date. Here are a few mistakes to look out for:
Understating your business income
Overstating your business expenses
Incorrect payroll withholding or worker arrangements
Inaccurate or incomplete tax filing and reporting.
Affordable Care Act subsidies
A significant healthcare reform in the IRA is the extension of the Affordable Care Act (ACA) subsidies which were due to expire this year. Many small businesses, their employees, and self-employed individuals receive health insurance through public marketplaces. With the extension of the subsidies through 2025, the ACA marketplace plans will continue to be a cost-effective healthcare solution for small businesses.
Negotiation of prescription drug costs
Another problem faced by the small business community is the rising costs of prescriptions. Higher prescription costs drive up health insurance premiums, making it harder for small business owners to offer health insurance to their employees. In today’s competitive labor market, this can mean that small businesses have to miss out on prime candidates.
To combat the rising prescription costs, the IRA will allow Medicare to negotiate prices of select drugs such as insulin. Controlling these costs could keep healthcare costs lower, making it easier for small businesses to offer these benefits to their employees.
The IRA also pours in roughly $369 billion towards climate change initiatives. This is monumental for small businesses, which are disproportionately impacted by climate disasters like wildfires, hurricanes, and floods.
Unlike major corporations, most small businesses do not have the funding or insurance coverage to recover from these types of natural disasters. The climate change investment will be one step toward lowering the carbon emissions that fuel these climate disasters. The investment will also lower energy costs, so small businesses can expect a decrease in their energy bill.
Electric vehicle tax credits
The IRA will also extend the electric vehicle tax credits through 2032. If you are considering purchasing a business vehicle, now might be a good time to look into a new or used electric vehicle—doing so can get you up to $7,500 in tax credits.
There is, however, an important caveat: the tax break is only available for new vehicles with a sale price under $80,000 and used vehicles with a sale price under $25,000.
If you’re looking to purchase commercial vehicles, you can receive tax credits of up to $40,000 for electric commercial vehicles over 14,000 pounds.
Clean energy tax credits for homeowners
Lastly, the IRA extends the Residential Clean Energy Tax Credits to 2034. This tax credit encourages American homeowners to install energy-efficient appliances such as solar electric panels, solar water heaters, geothermal heat pumps, small wind turbines, and fuel cell property. Property placed before 2032 will qualify for a 30% tax credit, after which the credit will fall to 26% by 2033 and 22% by 2034. Not only can small business owners take advantage of these credits as a homeowner, but many in the clean energy sector may also see an increase in demand for their services and products.
The bill also introduces tax rebates such as the Home Owner Managing Energy Savings (HOMES) program and the high-efficiency energy home rebate. These rebate programs will be managed at the state-level, and the eligibility would vary based on your household income as well as the percentage of energy savings.
Under the HOMES program, you can get up to $2,000 in rebates for energy-efficient projects that reduce your home energy savings by at least 20%. If the project cuts your home energy saving by 35% or more, then you can qualify for $4,000 in rebates.
Further reading: A Big List of U.S. Small Business Tax Credits
The bottom line
The IRA is a complex piece of legislation that will make some significant changes for small businesses in the U.S. Not only does the introduction of the minimum corporate tax ensure a more equitable economy for small businesses, but it will also bring in billions of dollars that will be put back into the economy through tax, healthcare and climate initiatives.
How can Bench help
If you’re behind on your taxes, you’re likely behind on your bookkeeping as well, but don’t worry: we’ve got plenty of experience with situations just like these.
Bench Retro provides support for taxpayers who are more than two years behind on their bookkeeping. This specialized team of experts can help you sort out your books and maximize your deductions, often lowering the amount of tax owed. Once your books are caught up, Bench’s tax team can step in, getting your back taxes filed.