Tax Impacts for Business Owners: Inflation Reduction Act and More!

The Inflation Reduction Act (IRA) of 2022 is a slimmed-down version of the previously proposed Build Back Better bill. The new bill includes provisions specifically aimed at curbing the highest rates of inflation seen in recent decades, makes the largest investment in combating climate change in U.S. history, and raises taxes on corporations.

Here are the components of the IRA that will impact business owners, as well as a recap of expiring tax provisions, current rules, opportunities, and limitations.

Highlights of the Inflation Reduction Act

After months of negotiation, the Inflation Reduction Act was finally signed into law on August 16, 2022. Comparing Build Back Better with the recently passed IRA, there are a number of new items as well as elements that were in the original proposal that were ultimately excluded in the final version.

What is in the Bill?

There are only two tax increases, which are on large corporations, that were passed in the Inflation Reduction Act.

Corporate Alternative Minimum Tax (AMT)

For those companies making over $1 billion, the IRA will impose a corporate alternative minimum tax of 15% of financial statement income (also known as book income, as opposed to tax income) reduced by, among other things, depreciation and net operating losses. The new minimum tax is effective for tax years beginning after December 31, 2022.

Corporate Tax on Stock Buybacks

When publicly traded companies have excess funds, they sometimes repurchase their own shares to help support their stock price in the market. Prior to this law, there was no tax on this kind of buyback other than the tax shareholders would pay on any capital gains. The IRA will now impose a 1% excise tax on the fair market value when corporations buy back their stock.

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Tax Provisions Not Included

There were many tax provisions not included in the final bill that was signed into law.

• Income Tax Rates – The original proposal would have increased the top tax rate from 37% to 40%.
• Capital Gains Rates – The proposal was to increase the top capital gains rate from 20% to 40%.
• Section 1031 – This allows real estate investors to trade one property for another property without paying any tax on the trade. There was talk of eliminating that provision, but it did not make the final bill.

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• SALT (State and Local Tax) – This provision limits the amount of taxes you can deduct to $10,000. Certain larger states wanted a SALT provision repeal which would have eliminated the $10,000 cap on the amount of taxes that can be deducted against federal income tax. This repeal was not passed.
• Net Investment Income Tax – Generally, this is an income tax on higher earners on passive income such as interest dividends and real estate. The original proposal wanted to increase that tax for businesses as well, but it did not pass.
• Qualified Bonus Income Limitations – In effect, this is a deduction that lowers the business income tax rate from 37% to 30%. There was a repeal to increase it back to 37% but it wasn’t included in the final bill.
• Estate Tax – Currently, the floor for estate tax is $10 million for an individual ($20 million for a married couple). It was proposed to lower it to $5 million for an individual and $10 million for a married couple, but the proposal did not pass.

All the tax provisions that were in the Build Back Better bill went by the wayside and the only provisions that did pass directly increase taxes on large corporations.

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IRS Agents

These taxes on large corporations will raise some money, but how will the government raise enough to pay for the green energy provisions in the bill? By hiring more IRS agents, employing them to perform more audits, and collecting the money.

The IRA provides approximately $80 billion over 10 years to fund the IRS and improve its tax enforcement activities and technology. They plan to hire roughly 87,000 new employees, a lot of which will be auditors targeting those that make over $400,000.

The Congressional Budget Office estimates the infusion of funds will allow the IRS to collect $203 billion over the next decade from corporations and wealthy individuals.

Green Provisions

The IRA includes significant provisions to combat climate change.

• Clean Vehicle Credit – Under the IRA, the plug-in vehicle credit has been renamed the clean vehicle credit and several significant changes take effect after December 31, 2022.
• The manufacturer limitation of 200,000 on the number of vehicles eligible for the credit has been eliminated. If a vehicle meets the requirements, it does not matter how many are produced.
• The credit is still $7,500 for new vehicles. However, there is now an income threshold of $150,000 for single filers, $300,000 for married filing joint.
• Price limits are now in place which are $80,000 for SUVs and $55,000 for cars.
• New with this law is a used vehicle credit of $4,000. However, there is a more stringent income limit of $75,000 for single filers, $150,000 for married filing joint.
• Further requirements for this credit are final assembly and battery material sourcing must be in the U.S.
• Other Energy Provisions
• Residential Solar Credit – The old law was already phasing down the tax credit from 30% to 26% in 2022. Now, the 30% credit is in place until 2032.
• Energy-Efficient Home Improvements – Previously, the credit was 10% of the cost of energy-efficient home improvements with a lifetime cap of $500. Now, the credit is 30% of the cost with an annual cap of $1,200 (no lifetime cap).
• Energy-Efficient Home Credit – The old credit on new home construction was $2,000 through 2022. Now, the new credit is $5,000 and it has been extended through 2032.

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Healthcare

One area of the Inflation Reduction Act where some will feel financial relief is in the healthcare provisions. Two items of significance are:

• Marketplace Health Insurance Premium Tax Credits – These credits began in 2014 and were extended through 2022 by the American Rescue Plan Act. The IRA extends the credit for an additional three years through 2025.
• Medicare Costs – Items regarding Medicare include:
• Cap on out-of-pocket costs for certain drugs at $2,000 per year
• Cap on monthly co-pays for insulin capped at $35
• Elimination of cost sharing for adult vaccinations

Employee Retention Credit

If your business hasn’t taken advantage of the Employee Retention Credit (ERC), now is the time to act! The ERC is a potentially significant credit for paying employees after you've had an impacted year from COVID.

To measure if you've had an impacted year, calculate whether you had a significant decline in gross receipts. When calculating for 2020, gross receipts need to be less than 50% in a 2020 quarter when compared to the same quarter in 2019. For 2021, gross receipts need to be less than 80% in a 2021 quarter when compared to the same quarter in 2019.

Businesses can also qualify for the ERC by passing the government shutdown test. Even if you don't pass the previous two mechanical number tests, you can qualify if your business was impacted by a government-issued order that made you shut down or at least reduced your business in such a way that you had enough of a decline in a certain segment of business. If you meet this test, you don't need to calculate the percent decline in sales, you will automatically qualify for the credit.

The Employee Retention Credit can be quite lucrative for businesses. For 2020, it's $5,000 per employee and for 2021, it's $7,000 per employee per quarter for the first three quarters. That can add up to $26,000 per employee for both 2020 and 2021. If your business qualifies, make sure you act to receive this credit.

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Depreciation Update

Section 179

Section 179 allows a business to deduct (rather than depreciate over a number of years) the cost of purchasing eligible new or used assets (i.e., equipment, furniture, off-the-shelf computer software, and qualified improvement property).

For qualifying assets placed in service in 2022, the expensing limit is $1.08 million. Then it begins to phase out dollar for dollar when asset acquisitions for the year exceed $2.7 million. One key point to remember is that you can only claim the election to offset net income, not to reduce it below zero to create a net operating loss.

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Bonus Depreciation

Similar to Section 179, bonus depreciation also allows a business to deduct the entire cost of an eligible new or used asset in the first year. However, there are two key distinctions between the two concepts:

• Bonus depreciation does not have the dollar limit Section 179 does.
• Bonus depreciation can increase a loss, whereas Section 179 can only offset your income.

2022 will be the last year a business can deduct 100% of the cost of an asset, so now is the time to purchase new equipment before year-end. Bonus depreciation will continue to exist after 2022, but it will begin to phase down 20% each year over the next four years. Starting in 2027, normal depreciation rules will apply.

Section 163(j) Limitation of Interest Expense

Effectively this rule tries to curb the interest expense deduction for large companies, and it does so by only allowing a business to deduct as much interest as a multiple of its earnings. This rule only applies to large companies with gross receipts averaging over $27 million.

Why is this important now? Up to 2021, the earnings you reported in regard to this rule did not include depreciation expense. Beginning in 2022, a company can no longer include the benefit of an addback of depreciation and amortization expense.

Before electing out of the 163(j) limitation, consult with your tax advisor that your business qualifies for the election. In general, the election may be available to a real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage business.

Pass-Through Entity Business Losses

Provisions had been put in place, which were suspended during the pandemic, that stated if you have business losses, you can't offset more than $250,000 ($500,000 for married filing joint) of income from a pass-through entity from other sources such as salary, self-employment income, interest, dividends, and capital gains.

The CARES Act temporarily lifted this limit, allowing taxpayers to deduct 100% of business losses arising in 2018, 2019, and 2020. But the limit returned in 2021, and the American Rescue Plan Act extends it through 2026.

Prepare for Tax Time

A tax professional can help you plan effectively to take advantage of the credits and deductions available under the IRA and other federal laws. Now is a great time to start planning!