Will the Inflation Reduction Act (IRA) reduce inflation? That remains to be seen. But one thing it will do: lower taxes for many small business owners — or at least business owners who take advantage of some of its provisions.
Much has been written about the new law’s tax increases, especially for large corporations. There will be a new alternative minimum tax of 15 percent for companies earning more than $1 billion. And there will be a new excise tax on stock purchases. In addition, the IRS will receive $80 billion in additional funding to increase enforcement, a move that will affect both large and small firms.
These factors have made me somewhat critical of the new law, because the tax hike affects the money that small businesses — and their employees — spend.
But there is some good news. There are five new goodies in the package that will save small businesses money on their taxes over the next few years.
For starters, there’s an extension of the qualified business income deduction from 2025 to 2027. Otherwise known as the pass-through deduction, the popular repeal (enacted as part of the Tax Cuts and Jobs Act of 2017) allows many “pass-through” companies (S Corporations, partnerships, and other entities where business income “passes through” to the business owner’s individual return) a 20 percent deduction on their business income. This benefit, especially for those making more than $400,000, was on the block during the IRA negotiations.Not only did it survive, but business owners now have two more years to enjoy it.
Second, the IRA gives small business owners the opportunity to enjoy generous tax credits when purchasing used or new electric vehicles. There is a $7,500 “clean vehicle credit” for vans, SUVs and pickups costing $80,000 and $55,000 for all other vehicles.
There is also a credit of up to $4,000 for a used vehicle tax credit. Both loans have income limits. It is not clear whether this discount can be enjoyed by businesses (it seems not). But given the overlap of personal and business expenses of the typical small business owner — especially gig workers and freelancers — it’s sure to be used somewhere. I recently drove a Nissan Leaf and I can vouch for how great these cars are. I bet the credit will encourage many entrepreneurs to buy electric vehicles like it, allowing them to save on taxes and fuel costs.
Third, there are now a variety of tax credits and deductions available to individuals who invest in energy efficiency improvements. This includes solar panels, batteries, energy efficient appliances, water heaters, heat pumps and cooling systems. These are “residential” benefits, so it is unlikely that a business will be able to get the same deductions when investing in similar equipment on their property. Regardless, there is a tax savings on the owner’s individual return. And, as a tip for the corporate world, the IRA also modifies, expands, and creates a number of tax credits for green energy, construction, efficiency, and other efforts by businesses primarily through 2033.
Businesses that offer the types of green energy and eco-friendly appliances and services that homeowners will be looking for will likely see an increase in their demand as well. For small businesses that buy or sell manufacturing parts used in renewable projects (such as wind turbines and solar panels), there are more tax credits available.
Finally, there has been an expansion of the increasingly popular research and development tax credit. The R&D credit has been around for years and gives businesses of all sizes the opportunity to reduce the taxes they owe based on a formula calculated using the costs they’ve incurred to develop new products. Before the IRA, businesses could apply the credit against their income or payroll taxes, but if they chose to do so against their payroll taxes, it was limited to $250,000. This limit has been increased to $500,000.
The Inflation Reduction Act can reduce inflation in the long run. Or it may not be. It could increase our deficits. Or it may not be. Maybe it’s a typical tax-and-spend bill cleverly passed before a big election. Or maybe it’s a game-changing piece of legislation that will have positive effects for years to come. Nobody really knows.
But I do know this: taxes are a profit-generating business owner’s biggest cost. And this bill will certainly help business owners reduce them.
Gene Marks is the founder of The Marks Group, a small business consulting firm. He appears frequently on CNBC, Fox Business and MSNBC.