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 on large corporations. There will be a new alternative minimum tax of 15 percent on companies earning more than $1 billion. And there will be a new special tax on share buybacks. In addition, the IRS will receive $80 billion in additional funding to step up enforcement, a move that will affect both large and small businesses.
These factors have made me somewhat critical of the new law because tax increases affect the money spent by small businesses and their employees.
But there is good news. There are five new products in the bundle that will save small businesses money on their taxes for years to come.
For starters, there’s the extension of the qualified business income deduction from 2025 to 2027. Also known as the pass-through deduction, the popular repeal (enacted as part of the Tax Cuts and 2017 jobs) allows many through businesses (S corporations, partnerships, and other entities where business income “passes through” the business owner’s individual income) a deduction of 20 percent of their business income. This benefit, particularly for those earning more than $400,000, was on the cards during the IRA negotiations. Not only did it survive, but employers now have two more years to enjoy it.
Second, the IRA offers small business owners the opportunity to enjoy generous tax credits when purchasing new or used electric vehicles. There is a $7,500 “clean vehicle credit” for vans, SUVs and pickup trucks 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 credits have income limitations. It is not clear whether businesses can enjoy this deduction (apparently not). But given the overlap of personal and business expenses for the typical small business owner, especially gig workers and freelancers, it’s sure to be used somewhere. I recently drove a Nissan Leaf and can vouch for how great these cars are. I’m betting the credit will encourage many entrepreneurs to buy electric vehicles like this, saving them taxes and fuel costs.
Third, there are now a variety of rebates and tax credits available to people 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’s unlikely that a business can take these same deductions when investing in similar equipment that it owns. Regardless, it’s a tax savings on the homeowner’s individual tax return. And, in a tip of the hat to the corporate world, the IRA also modifies, expands, and creates a variety of tax credits for green energy, construction, efficiency, and other corporate efforts primarily through 2033.
Companies that offer the types of green energy and environmentally friendly equipment and services that homeowners will be looking for will also see an increase in their demand. For small businesses that buy or sell manufactured parts used in renewable projects (such as wind turbines and solar panels), more tax credits are 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 offers companies of all sizes the chance to reduce the taxes they owe based on a formula calculated from the expenses 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 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 maybe not. It can increase our deficits. Or maybe not. Maybe it’s a typical tax-and-spend bill cleverly passed before an important election. Or maybe it’s a game-changing law that will have positive effects for years to come. Nobody really knows.
But I do know this: Taxes are the biggest cost of owning a profit-making business. And this bill will certainly help employers reduce them.
Gene Marks is founder of The Marks Group, a small business consulting firm. He appears frequently on CNBC, Fox Business and MSNBC.