2023 Business Tax Wrap-up: The Inflation Reduction Act

 With the clock ticking on 2023 business tax filings, here’s a quick look at some of the important considerations, credits and deductions for businesses to take advantage of from The Inflation Reduction Act.

Passed in 2022, The Inflation Reduction Act is an attempt to slow inflation through a multi-pronged approach of reducing the federal government budget deficit, lowering prescription drug prices, investing in domestic energy and promoting clean energy. The broad aim of the Act is to boost economic growth, labor supply and increased productivity while reducing socio-economic inequality and environmental damages.

From a business tax perspective, the Act opened up some exciting new tax credits, deductions and rebates:

Small Business Health Care Costs

The Act preserves the American Rescue Plan’s premium tax credit support for Affordable Care Act (ACA) plans through 2025.

Some small businesses may qualify for the Small Business Health Care Tax Credit by enrolling in the Small Business Health Options Program (SHOP) if they meet the following criteria:

• Fewer than 25 full-time equivalent employees
• Average employee salary is $56,000 annually or less
• Pay at least 50% of full-time employees’ premiums
• Offer SHOP coverage to all full-time employees

Small businesses that qualify can receive a tax credit equal to as much as 50% of the cost of employee premiums. (Up to 35% for non-profit employees.) 

Research and Development Credit

The R&D tax credit is often misunderstood by many businesses to mean it only applies to businesses in the actual field of research and development. But the reality is that many businesses can qualify for the credit, from architecture firms to software and technology companies to manufacturers. The Inflation Reduction Act doubles the R&D credit for small businesses (with gross receipts under $5 million in revenue) from $250,000 to $500,000. That gives businesses $250,000 against Social Security and $250,000 against Medicare respectively.

Examples of work that qualifies are the development or design of new products or enhancing existing processes and prototypes, using automation to streamline manufacturing, refining processes to increase productivity and reduce waste and energy consumption, etc.

Typically, 6% to 8% of a company’s annual qualifying R&D expenses can be applied against the tax liability. See the IRS’ guide for the full explanation of the credit and requirements.

Tax Incentives to Cut Energy Costs for Small Business

The Inflation Reduction Act has a number of ways to encourage small businesses to become more energy efficient and consider alternative energy sources to help combat the growing climate concerns. Here’s a quick summary of the provisions:

• 30% tax credit to cover the cost of switching to low-cost solar, which in turn lowers business operating costs and helps protect against volatile energy pricing.
• Up to $5 per square foot tax credit to support energy efficiency improvements that lower utility costs in commercial buildings.
• Up to 30% tax credit for businesses that replace large vehicles (trucks and vans) with clean electric and fuel cell vehicles for commercial use.

See the full list of business credits and deductions on the IRS website.

When it comes to business tax law, seek advice from trusted advisors.

In tandem with a trusted team of business and tax advisors, an experienced tax attorney can help small businesses identify and use tax credits to their best advantage. Our team of knowledgeable attorneys is well-versed in the intricacies of business and tax law, and can help ensure your business doesn’t leave money on the table. Contact us today for a free consultation.