New legislation called the Inflation Reduction Act (IRA) was recently signed into law on August 16, 2022. Based on President Biden’s Build Back Better plan, the IRA will invest roughly $750 billion into health care, taxes, and climate change.
The legislation will have widespread effects for all Americans, including small business owners and their families. Here’s what you need to know about the bill and how it might affect you.
How the bill will affect American small businesses
There are several components of the IRA that impact small business owners, either directly or indirectly. Let’s explore them below.
One of the act’s chief aims is to reduce the budget deficit, in part by increasing taxes on huge corporations. Here are the key provisions:
- Corporate minimum tax: Starting in 2023, corporations that have a net income over $1 billion (calculated over a three-year period) will have to pay a 15 percent alternative minimum tax (AMT).
- Excise tax on corporate stock buybacks: Starting in 2023, publicly traded US corporations will be subject to a nondeductible 1 percent excise tax on the fair market value of any of their stock repurchases. In general, a stock repurchase is when a company buys back its own shares, but the provision expands the definition to include “economically similar activities” to a buyback. The provision also includes a handful of stipulations and exceptions to the rule. For example, stock repurchases under $1 million won’t be subject to the excise tax.
- Increased IRS funding: The IRA will give $80 billion to the IRS over 10 years, $46 billion of which is designated for enforcement purposes—to ensure that large corporations adhere to the new tax provisions. The rest will go toward streamlining operations, modernizing systems, and improving taxpayer services.
It’s important to note that these tax provisions only apply to large corporations making large amounts of money. Small and medium-size businesses won’t be directly affected by the changes, and the IRA stresses that businesses earning under $400,000 a year won’t pay more taxes than they do now.
The act’s tax provisions—which will bring in hundreds of billions of dollars in federal tax revenue over the next decade—are designed to help fight inflation. If the provisions work and inflation goes down, your business may see lower supplies costs and higher revenues.
Plus, with more investments in IRS taxpayer services, you might have an easier time filing documentation online through the Free File service, calling the IRS to ask questions, and learning more about the tax credits and benefits your business is entitled to.
Health insurance costs
Rising health insurance costs have squeezed many small business owners’ finances, but the IRA aims to keep health care more affordable by extending Affordable Care Act (ACA) subsidies. In 2021, the American Rescue Plan Act temporarily expanded ACA health care subsidies, making premium subsidies available to households earning above 400 percent of the federal poverty line.
Part of the increased subsidy is a premium tax credit (PTC), a refundable credit that helps people cover their health insurance premiums. A PTC can lower the cost of ACA premium contributions for midlevel health plans to no more than 8.5% of a family or individual’s income. With the IRA, the increased subsidy—and the PTC—is available for another three years, through 2025.
Though the subsidy extension is a win for employees, it could increase your business’s chance of getting penalized if you don’t comply with the ACA employer shared-responsibility mandate. Here’s how: If one of your higher-earning employees qualifies for the ACA subsidy and PTC, the IRS will get an alert to check your organization. The ACA’s mandate requires that all employers with 50 or more full-time (or equivalent) employees offer ACA-compliant coverage; if you don’t, you could get penalized $2,750 (for 2022) per full-time employee.
One way to meet the ACA’s requirements is to switch from a group insurance plan to an individual coverage health reimbursement arrangement (ICHRA), which gives your employees the option to buy their own coverage on the ACA marketplace. ICHRAs can help you save costs and avoid annual rate increases on group health plans, while still giving your employees lower deductibles.
As long as you comply with ACA requirements, the extension of the subsidies won’t negatively affect your business. However, with higher subsidies more widely available for the next few years, it could be a great time to change your insurance from a group plan to an individual plan.
Business tax credits
The IRA includes new and updated tax credits designed to reduce small businesses’ tax loads. Here’s what you need to know:
Update to the research and development (R&D) tax credit
Starting January 1, 2024, qualified small businesses can apply up to $500,000 (up from $250,000) in R&D tax credits to offset their payroll taxes. Businesses can also use the Federal R&D Tax Credit to offset the Medicare portion of their payroll taxes, when previously they could only offset the Social Security portion.
To qualify for payroll offsets, a business must have less than $5 million in revenue—and have generated revenue for fewer than five years. Many Fortune 500 companies claim this credit every year to offset their otherwise massive tax bills, as there is no set upper limit on the value of the R&D credit each year when applied against the income tax liability.
Energy-related tax credits
The IRA is also creating new tax credits for businesses that become energy-efficient. Starting in 2023, for example, companies that produce clean hydrogen and nuclear power will be eligible for tax credits.
Other notable additions to the IRA include an extension of wind and solar tax credits, expansion of tax credits for carbon capture, a new ability to take the production tax credit for solar deals, and a new manufacturing production tax credit for companies that create certain project components.
If your business invests in R&D activities, if you’re in the manufacturing industry, or if you’re prioritizing energy efficiency, you could be eligible for certain tax credits.
How the bill will affect American families
For American families and individuals, the IRA will have a big impact on household energy use, Medicare, and prescription drug costs. Here’s a breakdown:
One of the goals of the IRA is to help slow climate change and protect the environment. To that end, the IRA has included provisions to incentivize and reward people who make environmentally sustainable decisions. Here are some of them:
- Energy-Efficient Home Improvement Credit: Renamed and extended until 2032, homeowners who make energy-efficient improvements on their residential properties can take a credit up to $1,200.
- Residential Clean Energy Credit: Homeowners who buy clean energy property, like solar panels or geothermal heat pumps, can take up to 30% credit through 2034.
- Clean Vehicle Credit: Low to mid-income Americans who buy new electric vehicles will be eligible for a tax credit of up to $7,500, extended until 2032. Whether or not people get the full tax credit depends on a few factors, including where the cars are manufactured and where the battery components come from.
- Credit for Previously Owned Clean Vehicles: Low to mid-income Americans who purchase used electric vehicles will be eligible for up to $4,000 in tax credits (capped at 30% of the vehicle purchase price).
- High-Efficiency Electric Home Rebate Program: Homeowners who make energy-efficient upgrades (like installing electric stoves, efficient heat pumps, and electric water heaters) will be eligible for rebates up to $14,000, through 2032.
As an individual, you can cut down on home energy bills—and potentially save money in taxes—by making energy-saving improvements to your home.
If you run a business that provides eco-friendly home improvement services or energy-efficient home products, you might see increased demand from customers as a result of the new provisions. If your business is in the manufacturing industry, you’re also in a good position to benefit from the legislation, since a lot of the energy-specific provisions require products and supplies to be made in the United States.
Medicare and prescription drug costs
A key component of the IRA is making prescription drug costs more affordable for Medicare patients. Here’s how:
- The Secretary of Health and Human Services (HHS) now has the authority to negotiate high-cost prescription drug prices for Medicare patients. It will start in 2026 with 10 specific drugs.
- In an effort to discourage drug companies from raising prices too quickly (faster than the rate of inflation), those who do will be required to give the government a rebate—starting in 2023—for the above-inflation amount of their price increase.
- Starting in 2023, the cost of insulin for Medicare patients will be capped at $35 per month.
- Starting in 2025, the annual out-of-pocket drug costs for Medicare patients will be capped at $2,000.
Medicare patients can expect better costs for prescription drugs and lower out-of-pocket caps. Non-Medicare patients can also get more affordable health care insurance with the extension of the expanded ACA subsidies.
The IRA is a hefty piece of legislation, but it contains a lot of provisions designed to support and uplift business owners. If the bill works as designed, it should help improve inflation and lower health care and energy costs for businesses and their families.