The sweeping legislation dubbed the Inflation Reduction Act of 2022 includes a wide range of provisions from reducing health care costs to promoting energy efficiency. The legislation also includes important considerations that could impact American businesses. Firms that understand these provisions can take advantage of the benefits provided by the act and prepare to absorb any additional costs.
The Inflation Reduction Act Could Raise Taxes for Large Companies
The Inflation Reduction Act seeks to cover the cost of other provisions and reduce the budget deficit by increasing taxes on the country’s largest corporations. These new taxes include:
Corporate Alternative Minimum Tax
Beginning in 2023, firms with income exceeding $1 billion in any 3 consecutive years could pay a 15% corporate alternative minimum tax. This could raise the tax liability of impacted companies and the effort required to file their annual taxes. Due to the nature of the tax, companies could be required to compute their regular tax liability and the new tax liability, then pay the greater of the two.
Excise Tax on Stock Buybacks
Companies could see higher taxes if they plan to pursue stock buybacks. The legislation imposes a nondeductible 1% excise tax on the fair market value of stock repurchases which occur after December 31, 2022, for publicly traded U.S. corporations.
Additional Funding for the IRS
In addition to a corporate minimum tax and new tax on stock repurchases, the Inflation Reduction Act will give an additional $80 billion to the IRS over 10 years. More than half of those funds are earmarked for enforcement – ensuring that individuals and corporations adhere to tax law. These additional resources could increase the likelihood of audits for some businesses, which would equate to more company resources being spent on compliance.
These new taxes and additional funding for the IRS could increase costs for the country’s largest corporations. However, businesses earning less than $400,000 a year will not pay any additional taxes.
The Inflation Reduction Act Includes Tax Credits for Small Businesses
While large corporations could pay higher taxes under the Inflation Reduction Act, small businesses could see some advantages. Many of these come in the form of extended tax credits.
Expanded Research and Development Tax Credit
The Inflation Reduction Act will double the federal R&D tax credit for small businesses. Previously, businesses with less than $5 million in income could claim a $250,000 tax credit to offset research and development expenses against the employer portion of Social Security tax. Under the new law, these businesses can claim an additional $250,000 against the employer portion of Medicare payroll taxes, bringing the total annual tax credit to $500,000.
Clean Energy Tax Credits
The Inflation Reduction Act creates several new energy efficiency tax credits for businesses. These include a tax credit up to 30% of solar power conversion costs, a tax credit up to $5 per square foot for energy efficiency improvements, and tax credits up to 30% of purchase costs for clean commercial vehicles.
With these new and expanded tax credits, small businesses could see lower costs as the Inflation Reduction Act takes effect. These tax credits could also encourage a shift to clean energy that could benefit the environment in the long run.
The Inflation Reduction Act Aims to Spur Energy Efficient American Manufacturing
The legislation includes several provisions intended to increase climate-friendly American manufacturing. Manufacturers in certain sectors could see significant cost savings with these new tax credits. This benefit is designed to help strengthen the American manufacturing sector while promoting sustainability efforts.
The law also includes $127 billion for a variety of clean energy manufacturing incentives, such as a 10% tax credit for using American materials and parts. In addition, it provides funding for investment in clean vehicle manufacturing and retooling outdated factories, particularly in the automotive industry. This sector was especially impacted by COVID-19 supply chain difficulties and these funds could help prevent similar struggles in the future.
These provisions could directly benefit manufacturers by reducing their tax liability. In addition, lower costs for American manufacturers could reduce the price of their goods, benefitting non-manufacturing companies further down the supply chain.
While the Inflation Reduction Act includes many provisions aimed at helping businesses, these provisions will be funded by higher corporate taxes. So, whether a business will benefit from the Inflation Reduction Act depends on their size, industry, and plans to invest in climate friendly changes.
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