Will the Inflation Reduction Act (IRA) reduce inflation? That remains to be seen. But one thing it will do: reduce taxes for many small business owners — or at least the business owners who take advantage of some of its provisions.
A lot has been written about the new law’s tax increases, particularly on big corporations. There will be a new 15 percent alternative minimum tax on companies making more than $1 billion. And there will be a new excise tax on stock buybacks. On top of that, the IRS will receive $80 billion in additional funding to step up enforcement, a move that will impact both big and small firms.
These factors have made me somewhat critical of the new law because tax increases affect the money 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 the extension of the qualified business income deduction from 2025 through 2027. Otherwise known as the pass-through deduction, the popular write-off (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 perk, particularly for those earning more than $400,000, was on the chopping block during the IRA’s 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 they buy used or new electric vehicles. There’s a $7,500 “clean vehicle credit” for vans, SUVs and pickups costing $80,000, and $55,000 for all other vehicles.
There’s also a credit of up to $4,000 for a used vehicle tax credit. Both credits have income limitations. It’s not clear whether this deduction can be enjoyed by businesses (it appears that it’s not). But given the overlap of personal and business expenditures of the typical small business owner – particularly gig workers and freelancers – it’s sure to be used somewhere. I drove a Nissan Leaf recently and can vouch for how great these cars are. I’m betting the credit will encourage many entrepreneurs to buy electric vehicles like it, allowing them to save on their taxes and fuel costs.
Third, there’s now a variety of tax credits and rebates available for individuals investing 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 in their property. Regardless, it’s a tax savings on the owner’s individual return. And, in a hat tip to the corporate world, the IRA also modifies, extends and creates a variety of tax credits for green energy, construction, efficiency and other efforts by businesses primarily through 2033.
Businesses providing the types of green energy and environmentally friendly equipment and services that homeowners will be seeking will surely see an uptick in their demand too. 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’s been an extension to 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 expenses they’ve incurred to develop new products. Prior to the IRA, businesses could apply the credit against their income or payroll taxes, but if they chose to do this against their payroll taxes, it was limited to $250,000. That limit has been increased to $500,000.
The Inflation Reduction Act may reduce inflation in the long term. Or it may not. It may increase our deficits. Or it may not. Maybe it’s a typical tax-and-spend bill adroitly passed before a major election. Or maybe it’s a game-changing piece of legislation that will have positive effects for years to come. No one 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 founder of The Marks Group, a small-business consulting firm. He frequently appears on CNBC, Fox Business and MSNBC.