The Inflation Reduction Act (2022) is important economic legislation for your small business. The Act provides new advantages for small businesses and the working class. These two groups have historically existed in the shadow of much larger businesses and the upper class. The Inflation Reduction Act reduces prescription drug costs, caps higher healthcare costs, and provides incentives for businesses and private citizens to embrace energy-saving investments. For business purposes, the Inflation Reduction Act levels the competitive playing field between large corporations and small businesses. It does so by increasing the taxes paid by larger corporations. Historically, bigger businesses have been able to leverage tax breaks that small businesses have rarely gotten to enjoy.
As small business owners and other taxpayers are planning for the coming year, it has left many with questions. In this post, we give an overview of the Inflation Reduction Act, the advantages it affords small businesses, and practical ways business owners can prepare for the first tax season since the Act has gone into effect.
What is the Inflation Reduction Act?
The Inflation Reduction Act is a federal law that aims to limit inflation by reducing the deficit, lowering prescription drug prices, and investing in domestic energy production while promoting clean energy. Experts vary in their opinion as to whether the Act will reduce inflation. The Penn Wharton Budget Model (PWBM) projects that the legislation will not have a significant impact on inflation. PWBM is an independent, research-based organization at the University of Pennsylvania that creates an economic analysis of public policy’s fiscal impact. On the other hand, the current administration projects that the Act will provide Americans with much-needed inflation relief.
More hopefully, however, the Act is expected to significantly reduce the deficit over the next decade. To that end, it will impose a minimum 15% tax on all corporations generating over $1 billion in annual recurring revenue. This 15% tax will be coupled with a 1% excise tax on corporate share buybacks and $80 billion in additional annual spending to help the IRS close the tax gap. The result of these efforts is that tax revenue should increase by $300 billion over the next decade. Ultimately, it should reduce the net deficit by $102 billion.
What Advantages does the Inflation Reduction Afford Small Business Owners?
The current state of the American economy means that many small business owners face the following challenges:
- Increased business expenses. Inflation has increased costs for new equipment and its maintenance. The cost of medical insurance premiums has also increased.
- Supply chain issues. Studies indicate that consumers will stop buying from a brand entirely if they experience delays or shortages in their orders. Small businesses often struggle to compete with larger businesses amid supply chain interruptions. In a Goldman Sachs survey, approximately 60% of small businesses reported that suppliers prefer large-volume orders from big businesses over small companies.
- Labor shortages. Due to the pandemic and inflation, small businesses are facing high resignation rates as well as difficulty finding employees willing and able to return to work.
The Inflation Reduction Act aims to address some of these challenges, allowing small businesses to thrive alongside their much larger business competitors. The following are some of the advantages the Act affords small businesses:
Maintain Lower Healthcare Costs
The Inflation Reduction Act helps small businesses by reducing their healthcare costs. Notably, the Act achieves three things- it extends Affordable Care Act (ACA) subsidies through 2025, allows Medicare to negotiate drug prices, and caps Medicare recipients’ drug expenditures at $2,000 per year.
Small businesses tend to have a higher proportion of uninsured employees than larger companies. This poses a serious problem for both business owners and their employees. Before the Affordable Care Act, many small businesses couldn’t afford health insurance. It wasn’t unusual for a sole proprietor to pay over $1,000 a month for a fairly uncomprehensive policy. The American Rescue Plan made healthcare subsidies more affordable for those buying insurance on ACA exchanges but those subsidies were due to expire at the end of 2022. The Inflation Reduction Act extends those subsidies through 2025. The subsidy extension is a huge win for small businesses. Typically, ACA exchanges are primarily used by small businesses, their employees, and the self-employed.
Negotiating drug prices with Medicare also represents a step in the right direction. Americans typically pay more for drugs that are less expensive in other industrialized countries. In 2026, the Inflation Reduction Act will reduce the prices of 10 drugs. Medicare will be able to negotiate directly with drug companies. Additionally, capping Medicare recipients’ out-of-pocket expenditures will hopefully allow both business owners and their employees to afford prescription drugs they may have struggled to get before.
Lowers Prescription Drug Costs for Seniors
The Inflation Reduction Act also takes a targeted approach to reducing prescription drug costs for seniors. Seniors comprise a significant portion of small business owners in our society. This demographic spends a lot of money on prescription drugs. As noted previously, Americans often pay more for prescription drugs than in other countries. Additionally, the cost of these drugs has risen dramatically over recent years. Consequently, many seniors have been forced to cut back on their medication. Unfortunately, this leads to greater health problems.
The Inflation Reduction Act addresses this problem by improving prescription drug coverage and lowering the cost of prescription drugs for seniors for its active period. It also significantly reduces drug costs for all other consumers, including those who do not receive government subsidies or high-deductible insurance plans.
The Act also provides access to several free vaccines and allows Medicare to negotiate the prices of expensive medicines when drug manufacturers increase their prices drastically. This means that consumers can buy more than one drug at once without having to worry about paying more out of pocket. Furthermore, they don’t have to risk their ability to pay for other necessities because of crushing medical debt.
This is good news for small business owners for whom older generations constitute their employee and customer base.
Cuts Energy Costs for Small Businesses
One of the most effective ways to reduce costs for small businesses is to cut energy costs. The Inflation Reduction Act includes several provisions that will save small business owners money on energy costs:
- Small businesses can receive a tax credit that covers 30% of the cost of switching over to low-cost solar power. The credit lowers operating costs and protects against the volatile energy prices that are currently squeezing small businesses.
- Small business building owners can receive a tax credit of up to $5 per square foot to support energy-efficient improvements that deliver lower utility bills.
- Small businesses that use large vehicles like trucks and vans will benefit from tax credits covering 30% of purchase costs for clean commercial vehicles, like electric and fuel cell models.
As small businesses save on energy costs, they will also help combat the climate crisis. The frequency and scale of natural disasters have placed small businesses and communities at greater risk of devastation. The Inflation Reduction Act’s historic action on climate change will provide economic stability and growth for businesses across the country.
Increased Business Efficiency and Opportunities
For small businesses in the clean energy/climate change sector, the Inflation Reduction Act opens up opportunities. For example, the Homeowners Clean Energy Tax credits those consumers who install solar panels or purchase energy-efficient products. Products that qualify for the credit include water heaters, HVAC systems, and heat pumps. Accordingly, small businesses that can meet this need should see an increase in the demand for their services. Homeowners who transition to energy-efficient products pretty consistently use a small business for installation. Additionally, small manufacturers and suppliers should also experience increased demand for their products and services as many provisions for other incentives require products to be assembled in America.
Businesses are also recognizing that adopting electric vehicle technology will help their bottom line. Many companies rely on last-mile delivery speed and fuel efficiency. Accordingly, the Inflation Reduction Act’s tax credits help accelerate the transition to electric vehicle technology.
Improves the IRS speed and Doubles the Tax Credit for Small Businesses
The Inflation Reduction Act ensures a significant allocation of IRS funding to hire more supporting staff. This move will positively impact its working efficiency. The increased efficiency should benefit small business owners with quicker and simpler tax seasons. Those businesses making less than $400,000 a year are poised to receive the most benefit. Moreover, the Act levels the playing field for small business owners by doubling the tax credit for research and development. The current $250,000 budget will be increased to $500,000 for innovations. The research and development tax credit has been used to create technology ranging from life-saving drugs to energy-efficient lightbulbs. The additional tax credit will enable businesses to pour more resources into things like employee payroll.
How Can Your Small Business Prepare for the Next Tax Season?
The Inflation Reduction Act contains many positive changes and advantages for small businesses. However, as with any law, there are always unforeseen consequences. Undoubtedly, the Act contains tax increases for larger corporations. However, some of its provisions have the potential to increase operating costs for small and midsize businesses as well. To ensure that your business plays it safe, here is how you can prepare:
- Prepare for an audit. The Inflation Reduction Act granted the IRS an $ 80 billion budget increase. Increased funding means that the IRS is going to be able to hire more staff. Increased staff enables the IRS to cast a more careful eye over all businesses. Over the next decade, a large percentage of the budget will go into improving enforcement through technology and new hires. This potentially means more audits for companies that are less equipped to pay a lawyer $50,000 or more if their tax matter proceeds to court.
- Put more effort and resources into record-keeping. Audits require an intense look at spending records. Businesses should make sure they are keeping all the original receipts of any business expenses. Expenses like a trip, a business dinner, or an event, require proper documentation to prove how these expenses benefit the workplace. Verification of authentic records is essential for any tax deductions.
- Be mindful of unnecessary tax credits and tax deductions. Make sure you can prove the reasons for declaring certain substantial tax reductions with original documents. Any questionable declarations might attract unwanted attention from the IRS.
- Be open and honest. It is of the utmost importance that a business owner is open and honest with their tax consultant. This will allow the consultant to do their work properly and efficiently. The consultant should also provide the same transparency when answering questions. If the consultant lacks transparency or expertise, it’s wise to find a new consultant.
- Be aware of costs and profitability. The current economic projections indicate that the Inflation Reduction Act will make an impact in five to nine years. In the meantime, businesses need to exercise caution in their spending and not be completely reliant on promised economic relief. As energy prices keep rising, we can expect to be in this inflation cycle for a while. Business owners should be strategic in the way they price their products/services and how they pass the costs to their customers to ensure both sides are happy and profitable.
- Be aware that the new law could also increase general operating costs. Given the heavy emphasis on green energy, it’s counterintuitive that the new law could increase the costs of fuel and electricity. The Act is expected to accelerate the transition to green energy sources. However, the reality is that it isn’t presently able to completely replace the stability of fossil fuel energy. The technology to harness wind and solar power is still being developed.
The Waterways Company Is Here to Help Your Small Business!
We hope this post has provided valuable insight into the Inflation Reduction Act and how it benefits small businesses. Here at Waterways, we have years of experience navigating various economic seasons. We are committed to sharing valuable information so that your business can continue to thrive. Contact us today for all of your water filtration and dispenser needs!