It’s 2022, and we all know inflation has been skyrocketing. So when the Inflation Reduction Act of 2022 was passed by the house and the senate in August, some folks cheered, others grumbled.
Only time will tell if the IRA will actually reduce inflation. But when it comes to anticipating the effect thifs new legislation will have on your small business? No crystal ball needed. (If you happen to see one on sale, we’re interested!)
The IRA will be enacting plenty of tax cuts for your small business, but only if you know what to look out for. And we’ve got your back. To ensure you don’t miss out on some serious cash, we’ve put together a list of the most important incentives and tax credits available in the near future.
We know a lot has been said about this new law, so rest assured we’ll dig into some of those controversial facts and myths in next week’s blog post. For now, though, let’s get to the big stuff…how the Inflation Reduction Act is going to affect you.
Changes to Environmentally-Related Tax Credits
With the Inflation Reduction Act comes a slew of environmentally-related tax credits aimed at incentivising clean energy and sustainable choices for your family and business. Here are the top ones to be aware of!
1. New Energy Efficient Home Credit (NEEHC)
The NEEHC has now been extended to cover qualified new energy-efficient homes purchased before January 1, 2033. (The credit was previously available to contractors for qualified homes purchased before January 1, 2022.) The amount of this credit has also been increased, now maxing out at $5,000.
2. Nonbusiness Energy Property Credit
The IRA extends the personal credit for qualified nonbusiness energy property expenses from January 1, 2022 to January 1, 2033. The allowable credit is limited to $1,200 annually per individual, replacing the lifetime credit limitation.
The Act increases the credit to 30% of the amount incurred by you for qualified energy-efficiency improvements and property expenses. You’ll also be credited for any home energy audit costing $150 or less.
3. Residential Energy Efficient Property (REEP) Credit
The REEP personal tax credit is now available for fuel cell, solar electric and hot water, small wind energy, biomass fuel property, and qualified battery storage installed in homes before 2035 (up from 2024 pre-IRA).
4. Incentives for Alternative Fuel & Bio/Renewable Diesel
The Act has extended the personal credit for business use of biodiesel, renewable diesel, and alternative fuel from December 31, 2022 to December 31, 2024. You may now be entitled to claim a refund of excise tax for resale of alternative or biodiesel fuel mixtures, or for use of these mixtures for purposes other than which they were sold for.
5. Clean Vehicle Credit
Pre-Act, this credit was titled the truly incomprehensible NQPEDMV (New Qualified Plug-in Electric Drive Motor Vehicle) Credit. Legislators decided this alphabet soup needed some cleanup, and have now renamed it the “Clean Vehicle Credit.”
There’s no longer any limit on the amount of vehicles eligible for this credit, so long as they’re assembled in North America. There are limits on your modified adjusted gross income and the suggested retail price of each vehicle, however, so do consult with your accountant to make sure you qualify.
6. Credits for Qualified Commercial/Used Clean Vehicles
The credit for each qualified commercial clean vehicle purchased after December 31, 2022 is either 30% of the vehicle’s price (15% for vehicles powered by gas or diesel fuel) or the incremental cost of the vehicle over the cost of a gas or diesel-guzzling pick that’s otherwise comparable. For vehicles weighing less than 14,000 pounds, the credit limit is $7,500. For those weighing more, that limit increases to $40,000.
Should you purchase a used clean vehicle after December 31, 2022, you may be entitled to an income tax credit equal to either 30% of the vehicle’s sale price or $4,000 (whichever is less). Income limits do apply for the used clean vehicle credit.
Extension to Qualified Business Income Deduction
Small business owners now have two more years to take advantage of the qualified business income deduction, or the pass-through deduction. Initially enacted with the Tax Cuts and Jobs Act of 2017, this deduction allows S-corps and similar pass-through entities a 20% deduction on their business income until 2027.
Extension to R&D Credit
The research and development tax credit has been extended and expanded with this act, now increasing the credit limit from $250,000 to $500,000 for businesses who choose to apply the credit against their payroll taxes.
So which one of these applies to me?
Be sure to speak with a trusted tax professional to squeeze every bit of goodness out of this legislation. Without an eagle-eyed accountant to ensure you’re taking advantage of every available credit, you could be leaving thousands of dollars on the table.
Need help picking the perfect accountant for your small business? Check out our recent blog post on the topic, or cut to the chase by contacting KYN today to make sure you get every dollar you’re entitled to.