4 Ways the Inflation Reduction Act will impact Small Business Owners

 In IRS Problems, Tax Debt, Tax Filing, Tax Planning

After the demise of the legislation known as “Build Back Better” and several congressional false starts on smaller packages, the 50-50 Senate has recently passed a much smaller package known as the “Inflation Reduction Act”. Now that the hard part is over (passing a bill in the Senate), the legislation has a much smoother path to becoming law with easier margins in the House of Representatives and President Biden expected to sign. I have looked through the 755 pages of legislation, and here are the aspects which I feel will impact small business owners most, as well as a list of some of the other interesting provisions in the legislation.

#1- Increased Funding for the IRS

Because the Inflation Reduction Act was passed through the “reconciliation” process in the Senate (i.e. a 51-50 vote including all 50 Democratic Senators and VP Kamala Harris voting yes versus all Republican Senators voting no) rather than the 60 votes required for typical Senatorial bill passage (under the filibuster rule), the Inflation Reduction Act is required to pay for itself over a 10 year period without adding to the national debt. Senators Manchin and Sinema opposed both tax increases on individuals making over $400,000 per year as well as raising the C Corporation flat tax rate, so the bill will be funded through increased funding for IRS enforcement. This was also the case for the 2018 Tax Cuts & Jobs Act that was passed by reconciliation under President Trump. I can certainly attest to the increased enforcement that we have seen already in 2021 & 2022, and apparently more is on the way with the passage of the Inflation Reduction Act.

In addition to enforcement, taxpayer services will also receive a boost in funding, which should help alleviate some of the long hold times taxpayers (and their representatives) have experienced over the past two years. Significant investments will also be made to IRS operations support, which includes information technology improvements, research and statistics of income, more vehicles for the IRS fleet, business systems modernization, a free direct e-file tax return system for self-preparing taxpayers, additional funding for the U.S. Tax Court, and additional funding for U.S. Treasury Department offices.

There is a specific provision in the bill which states that nothing in the bill is intended to increase taxes on any taxpayer or small business with a taxable income below $400,000 or to increase taxes on any taxpayer not in the top 1%. However, with improved technology, resources, and research on taxpayer data by the IRS, it is highly likely that returns of all income levels that have anomalies from the norm will be detected for further inspection, potential adjustment, or examination (audit) by the IRS. It is simply a natural consequence of increased technology and efficiency. I would recommend that all taxpayers pay increased attention to their books and tax filings and retain important tax-related documents for their records, in the event that the increased enforcement falls on their doorstep.

#2- Affordable Care Act (Obamacare) Subsidies Extended through 2025

Middle income taxpayers who were previously priced out of ACA coverage received access to insurance premium subsidies during the Covid pandemic (under the American Rescue Plan of 2021) to allow them to more easily afford health insurance. These subsidies were due to expire at the end of 2021, but through the Inflation Reduction Act they have been extended through 2025. This is expected to affect over 13 million enrollees in Affordable Care Act insurance plans, which includes a substantial number of my clients. I am glad to see that this premium assistance extension went through, as many small business owners benefit from Affordable Care Act health insurance.

#3- Extension & Expansion of Residential Energy Tax Credits & New HOMES Rebate Program

Some of the largest and most beneficial credits that many of my clients have taken advantage of over the years involved residential energy credits. These credits apply to such home improvements as installing solar panels, energy-efficient windows and doors, heat pumps, wind-power equipment, and other improvements that taxpayers commonly make to modernize their homes. Taxpayers who have plans to make a home improvement soon should research whether it meets the qualifications for one of these credits, and potentially select an option that may reduce their taxes.

The Inflation Reduction Act extends the tenure of some of the residential energy credits that were due to expire, some by as long as 10 years. Some taxpayers may be familiar with the annual and/or biannual waiting games that often ensued in determining whether these credits would be renewed for a particular tax year, so an extension of 10 years is a welcome feature in this bill. In addition to the extension of current energy credits, the Inflation Reduction Act expands others, and also creates some new rebates for energy-efficient heating, cooling, power, and water improvements made to taxpayer residences.

The new rebate program called HOMES, is planned to be administered at the state level and applies to taxpayers with a household income that does not exceed 150% of the median income for the area where that taxpayer lives. For lower- and middle-income taxpayers who meet the income requirements for the rebate program, this is definitely worth looking into (assuming that the bill clears the House and is signed by the President as expected). Some of these rebates are several thousand dollars and do not involve the need to wait for an annual tax filing to access these funds. The HOMES program also provides rebate funds for qualifying energy-efficient home appliances such as stoves, ranges, ovens, cooktops, and clothes dryers.

#4 Extension & Expansion of Electric Vehicle Tax Credits

Another fan favorite for many of my clients over the years has been the electric vehicle (EV) credits. The amount of some of these credits for purchasing a new electric vehicle can be astounding (some as high as $7,500) and have a substantial impact on a taxpayer’s return. Given the price of gasoline these days, many Americans have been lining up to purchase EVs. With the expansion of the EV credits under the Inflation Reduction Act, this trend will likely continue well into the future. One of the unfortunate aspects of the EV credits before the Inflation Reduction Act was that the credits did not apply to used vehicles. However, under the new legislation, taxpayers may be able to claim a credit for up to $4,000 for qualifying used EVs. Another welcome change in the legislation is that there used to be a phase-out of the credit once a manufacturer (such as Tesla or GM) sold 200,000 vehicles. That sales threshold limitation has been removed in this legislation.

For taxpayers who are considering purchasing an EV, the credits will have both price restrictions for the cost of the vehicle as well as income-based restrictions (determined by the taxpayer’s filing status) that will impact who qualifies. There are also limitations based on where the assembly of the vehicle is located, as the bill incentivizes American manufacturing. Should the bill become law, it is important for taxpayers to research the specific EV that they plan to purchase to determine whether that vehicle qualifies for the EV credits if the taxpayer’s income is within the qualifying range. There are numerous other limitations that apply to the EV credits that are too lengthy to mention here, but the important point is to do the research before making a significant purchase of an EV, if you hope to take advantage of these credits.

Some Other Interesting Provisions that Likely Will Not Directly Impact Most of my Clients’ Tax Returns:

  • Implementation of a corporate minimum tax for C Corporations with book income greater than $1 billion
  • 1% excise tax on corporate stock buybacks where the stock is traded on an established securities market
  • Medicare prescription drug price negotiation for high-cost medicines
  • Cap on out-of-pocket prescription drug spending at $2,000 per year for Medicare Part D beneficiaries
  • Cap on the cost of insulin at $35 per month for Medicare beneficiaries
  • Clean energy credits for homebuilders and developers of low-income housing
  • Clean energy credits for manufacturers
  • Incentives for investment and production of clean electricity
  • Incentives for investment in clean transportation
  • Clean fuel production credits
  • Modification to the research & development credit against payroll taxes
  • Investments in rural development and agriculture for renewable energy projects
  • Funds for natural forest, parks, and public lands restoration and conservation
  • Investment in coastal communities for climate resilience
  • Clean vehicle manufacturing credits
  • Renewable energy infrastructure investments
  • Funds for drought mitigation and prevention
  • Air pollution regulation and mitigation funding and incentives
  • Funds for hazardous materials cleanup in economically disadvantaged communities
  • Funds to lesson environmental impacts on endangered fish and wildlife
  • Funding for renewable-energy updates to federal buildings
  • Updating US Postal Service fleet with zero-emission vehicles
  • Funding for clean energy resources and drought relief for Tribal lands

If you have questions on how the Inflation Reduction Act will impact your specific tax situation and would like to engage for a Comprehensive Tax Plan to assess your tax situation in relation to this bill (that is expected to soon become law), please contact me using the form below.

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