Inflation Reduction Act: Tax Provisions for Business Owners
December 14, 2022
On August 16, President Biden signed the Inflation Reduction Act of 2022 (H.R. 5376) into law, which addresses inflation, climate change, health care, and taxes. The new bill is a pared-down version of the Build Back Better Act, which stalled in the Senate last November.
Here are some key tax provisions included in the Inflation Reduction Act.
Corporate Alternative Minimum Tax
The Inflation Reduction Act imposes a 15% alternative minimum tax (AMT) on corporate book income, which refers to the profits a corporation reports to shareholders before tax deductions and credits are applied. However, this does not apply to companies owned by private equity firms, and there are exceptions for accelerated depreciation.
The new corporate AMT would prevent the wealthiest Americans from utilizing credits and deductions in the federal tax code to reduce their tax bills to little or nothing. Under the Inflation Reduction Act, corporations must calculate their taxes under the 21% corporate tax rate and the 15% corporate minimum tax rate and pay the higher bill.
The new AMT applies to corporations with profits that exceed $1 billion over any consecutive taxable three-year period and is effective for tax years beginning after December 31, 2022.
The bill includes a 1% excise tax on corporate stock repurchases for repurchases that occur after December 31, 2022. Some exceptions include stock contributed to pensions, retirement accounts, and employee stock ownership plans (ESOPs).
Clean Energy Credits
The Inflation Reduction Act allocates over $300 billion to expand and extend existing energy-related tax credits and introduces several new tax credits related to clean electricity, fuel, manufacturing, and vehicles. These include tax incentives for green energy projects, a $4,000 credit for purchasing used electric vehicles, a $7,500 tax credit for purchasing new electric vehicles, and an increase in the IRC Sec. 179D deduction from $1.88 per square foot to $5 per square foot.
Research and Development Credit
Under current law, qualified small businesses can elect to claim a portion of their research credit as a payroll tax credit against their employer Social Security tax liability, rather than against their income tax liability. This became effective for tax years that begin after December 31, 2015.
Qualified small businesses that elect to claim the research credit as a payroll tax credit do so on IRS Form 8974, “Qualified Small Business Payroll Tax Credit for Increasing Research Activities.” Currently, a qualified small business can claim up to $250,000 of its credit for increasing research activities as a payroll tax credit against the employer's share of Social Security tax.
The Inflation Reduction Act makes changes to the credit, beginning next year. It allows for qualified small businesses to apply an additional $250,000 in qualifying research expenses as a payroll tax credit against the employer share of Medicare. The credit can’t exceed the tax imposed for any calendar quarter, with unused amounts of the credit carried forward. This provision will take effect for tax years beginning after December 31, 2022.
A qualified small business must meet certain requirements, including having gross receipts under a certain amount.
Excess Business Losses
Another provision in the new law extends the limit on excess business losses for noncorporate taxpayers. Under prior law, there was a cap set on business loss deductions by noncorporate taxpayers. For 2018 through 2025, the Tax Cuts and Jobs Act limited deductions for net business losses from sole proprietorships, partnerships and S corporations to $250,000 ($500,000 for joint filers). Losses in excess of those amounts (which are adjusted annually for inflation) may be carried forward to future tax years under the net operating loss rules.
Although another law (the CARES Act) suspended the limit for the 2018, 2019 and 2020 tax years, it’s now back in force and has been extended through 2028 by the Inflation Reduction Act. Businesses with significant losses should consult with their tax advisors to discuss the impact of this change on their tax planning strategies.
The Act allocates approximately $80 billion in IRS funding over the next nine years for taxpayer services, enforcement, business systems modernization, and operations support.
Not in the Bill
The Inflation Reduction Act does not contain some notable items previously discussed in the Build Back Better Act. For example, the new bill does not include changes to the estate and gift tax rules, tax rates on long-term capital gains, qualified small business stock exclusions, and like-kind exchange rules. There are also no provisions for tax rate increases on high earners and no increase to the corporate income tax rate (which remains at 21%).
In This Issue
- Does Your Construction Company Qualify for the Research and Development Credit?
- Inflation Reduction Act: Tax Provisions for Business Owners
- Clean Energy Tax Credits in the Inflation Reduction Act
- Inflation Reduction Act Updates to the IRC Sec. 45L Tax Credit
- Contract Assets and Liabilities Within the Scope of ASC Topic 606 for the Construction Industry