In September, President Biden signed the Inflation Reduction Act, a wide-ranging bill that includes several changes that will affect small businesses. The majority of the Act’s changes go into effect on January 1, 2023. Read on to learn about provisions that may impact your small business and what you may need to consider for 2023 planning.
Small Business Taxes
While the Inflation Reduction Act increases the minimum tax rate for corporations with $1 billion or more in pre-tax income (of which there are about 150), it does not raise taxes on most small businesses or families earning less than $400,000 a year (which is about 98% of Americans, according to Forbes).
The intent of this tax change for the highest-earning corporations is to reduce the national deficit and, in turn, cool inflation (hence “Inflation Reduction” Act) – which would then spur economic recovery and growth.
The Act also raises the research and development tax credit for small businesses from $250,000 to $500,000. The credit allows qualified businesses to deduct the cost of eligible research and innovation from their taxable income. Small businesses also can use the research and development credit to offset the FICA portion of payroll taxes.
As noted in Business News Daily, the credit can:
- Reduce federal and state tax liabilities for the current year as well as future years;
- Increase market value and cash flow for your business;
- Lower the effective tax rate for your business; and
- Allow you to keep more of your profits
The Inflation Reduction Act will continue Affordable Care Act (ACA) subsidies through 2025.
According to USA Today, the subsidies offered through ACA healthcare exchanges are mostly used by employees of small businesses or self-employed individuals.
Pennsylvania operates its own state ACA healthcare exchange known as Pennie. Pennie offers health and dental plans and is the only place where Pennsylvanians can receive ACA subsidies to lower their premium costs.
The open enrollment period for health insurance plans on Pennie begins November 1, 2022 and runs through January 15, 2023. After January 15, individuals who experience a “Qualifying Life Event” are still eligible to shop for health insurance and can apply for the financial assistance.
The Act includes $369 billion in incentives for climate-related investments including renewable energy and electric vehicles. This includes:
- Homeowners Clean Energy Tax Credits – For homeowners who install solar panels or energy-efficient HVAC systems, heat pumps and water heaters
- Electric Commercial Vehicle Tax Credits – Credits of up to $40,000 for buying an electric commercial vehicle over 14,000 pounds (Footnote, the Act also extends until December 2023 credits for buying a new or used electric vehicle for personal use.)
Tax credits for the purchase of electric commercial vehicles can translate into cost-savings for small businesses. So, these federal investments may be viewed by certain small businesses as an opportunity, as demand for renewable energy and energy-efficient products and services grows.
Driving Down Costs
Isabel Guzman, Administrator for the U.S. Small Business Administration, has this to say about passage of the Inflation Reduction Act:
“This law not only tackles inflation and powers America’s transition to safer, cleaner energy, it also shrinks the budget deficit and—most importantly—drives down health care and energy costs for small businesses and their employees.
“Lower costs mean small business owners and entrepreneurs can focus on doing what they do best, creating jobs, developing talent, innovating, and opening doors of growth and opportunity across all of our communities—including selling more American-made goods and services to the world’s largest buyer: the U.S. Government.”
Turn to Us for Planning Advice
For over three decades, Gift CPAs has helped small businesses develop short-term and long-term strategies to achieve their goals. Our experts provide honest, objective advice based on specialized knowledge and experience.
Schedule an appointment with us to meet virtually or at one of our five locations in Harrisburg, Mechanicsburg, Myerstown, Ephrata or Lancaster. We look forward to discussing your goals and how our services can help you reach them.