At the signing of H.R. 5376: The Inflation Reduction Act of 2022, President Biden remarked that “With this law, the American people won, and the special interests lost. The American people won, and the special interests lost.”
But what does that mean? He said (twice!) that “the American people won”...so what’s the big prize? If you’ve been following the news, you’ve likely seen your fair share of highly politicized and rumor-laden reports. Never fear! We’re here to help you separate fact from fiction, and determine exactly what this Act means for you as a small business owner.
If you haven’t already, check out our first blog on the topic. We went over the most important incentives and tax credits available in the near future for small businesses. Give it a read to make sure you don’t miss out on some serious cash!
In today’s blog, we’ll be evaluating some recent concerns and rumors about this new legislation that have been floating around the internet. Without further ado, let’s bust some myths!
1. Concern: More funding for the IRS will increase audit scrutiny for small businesses.
Will the upcoming boost in employee headcount for the IRS translate to an increased risk for audit? That’s the 80 billion dollar question, so let’s dig in.
In a letter to members of the Senate, current IRS commissioner Charles Rettig insists that “these resources are absolutely not about increasing audit scrutiny on small-businesses or middle-income Americans.” He states that households earning less than $400,000 will see no rise in audit rates.
In this letter, Rettig details what the funds will be used for:
- Enhanced IT systems
- Taxpayer services
- Specialized teams to identify noncompliance among large corporations and global high-net-worth individuals
It’s safe to say that your small business will not be the primary target of this new IRS force. (Phew!) It would seem that this “new force” is just adequate staffing and resources for the chronically underfunded IRS.
2. Concern: This bill will be paid for by small businesses and working families.
According to an August 19th statement from the White House, “no family making under $400,000 per year will see their taxes go up by a single cent.” Unless you’re one of the top 2%, you’ve nothing to worry about.
What you will see is a significant increase in the amount of tax credits offered to small business owners and working families. The IRA expands the popular research and development credit for small businesses, extends the qualified business income deduction, and introduces a slew of environmentally-related tax credits. (But you already knew about those from reading Part One!)
The claim that this bill will raise taxes isn’t entirely incorrect. If you’re a large corporation, expect to pay your standard 15% minimum tax. However, this bill allows corporations to use adjusted earnings, “which can be massaged in a number of ways.” The tax likely won’t have a material impact on small businesses and families making less than $400,000 per year.
3. Concern: The tax hike on crude oil will raise gas prices.
The IRA will be paid for, in part, by a tax hike on crude oil and imported petroleum products. This doesn’t sound like good news after the skyrocketing price of gas over the last eight months due to the continuing Russian invasion of Ukraine. Why would the United States government enact any policy that might hike prices higher? The concern is totally understandable!
The tax increase, though, is just 16.4 cents per barrel. Each barrel typically has a 42 gallon capacity, so the cost passed on at the pump will be just $0.0039 cents per gallon.
The bigger-picture hope is that the IRA contains a path to American energy independence through funding for electric vehicle subsidies, green hydrogen, carbon capture, and environmental justice programs. The Act aims to reduce greenhouse gas emissions by 40% by 2030, and could offer your small business significant earnings through environmental tax credits.
Politics, economic impact, and monetary concerns across all tax brackets always get heavily debated when new legislation makes its way through the House and Senate. But ultimately, we’re not interested in debating the politics here — just the facts of what we know so far.
So is the Inflation Reduction Act going to run your small business into the dirt? According to our research, nope!
Will it actually reduce inflation? We don’t know. Only time will tell!
What we do know is that it’s worth it to get a trustworthy accounting team to help you navigate it all. Getting all your financial ducks in a row and being prepared for an audit at any time is a smart business practice. Plus, the IRA will be enacting plenty of tax cuts for your small business, but only if you know what to look out for.
We’ve got your back! Reach out to KYN Accounting today to navigate any new legislation and get started on a path to long-term financial wellness.