Since the Inflation Reduction Act passed on August 16, 2022, businesses of all sizes have asked, “What does this mean for me and my business?” From energy-related tax credits to tax provisions for startups, we’ll dissect the Inflation Reduction Act in simple terms and what it specifically means for your business.
Clean Energy Tax Credits
Electric Charging Stations
Before January 1, 2022, businesses could install electric charging stations and receive a tax credit. The Inflation Reduction Act of 2022 extends the credit to charging stations installed and put in service before January 1, 2033.
Commercial Clean Vehicles
The Act also provides a tax credit – covering 30% of purchase costs – for businesses that utilize commercial clean vehicles, such as electric cars and fuel cell vehicles. This tax credit is available for those vehicles placed in service after December 31, 2022.
Businesses can also take advantage of a tax credit to help them pay for energy efficiency improvements. The tax credit is worth up to $5 per square foot.
The Inflation Reduction Act offers businesses a tax credit that covers 30% of the cost it takes to switch to solar power.
The Act offers tax incentives for manufacturers using U.S.-sourced materials to manufacture clean energy technologies, including solar, wind, clean hydrogen, and carbon capture.
This will also help create U.S. jobs with fair wages and stimulate U.S. supply chains.
The Inflation Reduction Act establishes a Clean Energy and Sustainability Accelerator to finance state and local clean energy financiers, aiding the implementation of distributed zero-emission systems like heat pumps, community solar, and electric vehicle charging stations.
This accelerator was also created with the intention of helping startup clean energy businesses, with a focus on supporting disadvantaged communities.
The Act expands the Rural Energy for America Program, which helps rural small businesses, agricultural producers, and rural electric cooperatives make clean energy upgrades. These upgrades are intended to provide these businesses (and their customers) with reliability and affordability.
15% Minimum Tax
The Inflation Reduction Act requires corporations making $1 billion or more to pay a 15% minimum tax.
According to Vinson & Elkins, this 15% is actually a “corporate alternative minimum tax” (CAMT). This CAMT is “calculated based on book income rather than taxable income.”
This is why the 15% is lower than the flat 21% corporate tax rate that was in place between 2018 and 2020.
President Biden and Congress set it up this way to create fairness by strictly enforcing taxes on big businesses making over $1 billion annually that evade paying federal income taxes.
The Act will make corporations that make $1 billion or more unable to report low or no taxable income because they will need to calculate their taxes based on book income.
According to Vinson & Elkins, “The Stock Buyback Tax imposes a 1% excise tax on covered corporations on the fair market value of any stock of the corporation which is repurchased by such corporation beginning after December 31, 2022.”
This was put in place because many corporations commonly returned capital to their shareholders in this manner. Now, they will be taxed for this convenience.
The White House stated that the Inflation Reduction Act would keep the Affordable Care Act’s premium tax credit in place through 2025. The Department of Health and Human Services released a study that revealed 2.6 million small business owners and the self-employed depend on the ACA Marketplace for coverage.
The ACA was extended to save 13 million Americans an average of $800 per year on their health insurance premiums. The goal behind this was to encourage more entrepreneurs to start small businesses without worrying about losing health insurance coverage.
The Inflation Reduction Act doubled the Research and Development (R&D) tax credit in an effort to give more startups the opportunity to invest in research and development activities, which can help them create more jobs and support economic growth.
Again, according to the White House, the Act helps “level the playing field” by helping more small businesses take advantage of this tax credit when, historically, larger businesses have been able to take advantage of it to a larger extent. The Act does this “by increasing the refundable research and development tax credit for small businesses from $250,000 to $500,000.”
The White House continues: “Small businesses, starting in 2023, may use the credit to further reduce payroll taxes and several other business expenses by up to $500,000 annually so they can do what they do best: innovate and commercialize to solve global problems and create jobs to propel our economy forward.”
Talk to your tax professional about what tax credits you can take advantage of from the Inflation Reduction Act.
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