Can this legislation Inflation Reduction Act (IRA), lower inflation? It remains to be seen. One thing it is sure to accomplish is to lower taxes for many small-business owners, or at least for business owners who make use of some of its features.
Much has been written about the law’s tax hikes, especially for large corporations. There will be a brand new marginal tax of 15 percent for companies that make over $1 million. Additionally, there will be an excise tax that will be new for stock buybacks. In addition, it is expected that the IRS will get an additional $80 billion to boost enforcement. This move will affect both large and small companies.
These issues have made me somewhat skeptical of the new law, as tax increases affect how much small-sized businesses and their employees spend.
However, there’s some positive news. Five new features in the bundle will aid small-scale businesses in reducing their tax bills over the next few years.
The qualifying deduction for business income is initially expanded from 2025 to 2027. Also called the pass-through deduction, this popular write-off (enacted in the Tax Cuts and Jobs Act of 2017) gives numerous “pass-through” companies (S Corporations or partnerships, as well as other entities that have business income “passes through” to the individual tax returns of the business owner) to claim a deduction of 20 percent on the business income they earn. This benefit, especially for those earning over $400,000, was on the list of options during IRA negotiation. The perk was not just saved. However, business owners now have two years to benefit from it.
In addition, the IRA allows small-business owners to benefit from substantial tax credits when they purchase new or used electric vehicles. The $7500 “clean vehicle credit” for trucks, SUVs, and vans costs $80,000 and $55,000 for other vehicles.
Also, there’s the possibility of credit up to $4,000 in a used vehicle tax credit. Both credits come with income restrictions. It’s unclear if this deduction is available by companies (it appears not). But considering the overlap of the personal and business expenses of the typical small-business owner, particularly freelancers and gig workers – it’s likely to be utilized at some point. I recently drove the Nissan Leaf and can attest to how excellent these vehicles are. I’m betting that the credit will spur numerous entrepreneurs to purchase similar electric cars, allowing them to reduce their tax and fuel expenses.
Thirdly, an array of refunds and tax credits are available for those investing in energy efficiency upgrades. This includes solar panel batteries and appliances that are energy efficient such as heat pumps, water heaters, and cooling units. These are “residential” benefits, so it’s unlikely that a company will be able to take advantage of these deductions when they invest in similar equipment for their premises. It’s still an income tax deduction on the owner’s tax return. Also, as an effort to give a tip to corporate America, it is the IRA can also modify, extend, and grant a variety of tax credits that can be used for environmentally friendly energy and construction efficiency and other projects undertaken that businesses undertake primarily until 2033. Companies that offer the kinds of green energy and green-friendly products or services homeowners are likely looking for will also see an increase in demand. Tax credits are available for small businesses that purchase or sell parts for manufacturing used in renewable energy projects (such as solar panels and wind turbines).
In the end, there’s been an extension of the ever-popular tax credit for research and development. It’s been around for a while. R&D credit has been in use for a long time. It offers businesses of all sizes an opportunity to cut down on the tax they owe based on the formula calculated based on the costs they’ve incurred in developing new products. In the past, before IRA, businesses could use the credit for the tax on their earnings or payroll; however, if they wanted to use it to offset their payroll taxes, the distinction was restricted to $250,000. The limit has now been raised to $500,000.
This Inflation Reduction Act may reduce inflation over the long run. But it could not. It could add to our deficits. It could also not. Perhaps it’s a standard tax-and-spend bill that was successfully passed before the start of a significant election. Maybe it’s an essential piece of legislation that’s going to be beneficial for many future years. Nobody knows.
But I know that taxes are a company owner’s most worthwhile expense. The bill will assist business owners in reducing their tax burdens.