Inflation is one of the most talked about topics in the media today. It's easy to understand why: inflation significantly impacts the economy, personal finances, and investments. Right now, inflation sits at 8.5%.
While this is certainly not the highest inflation has ever been (it was nearly 15% in 1980), it’s cause for alarm. That’s why the U.S. Congress has stepped in with a potential lifeboat from the Inflation Reduction Act. This is essentially a reformulation of President Joe Biden’s Build Back Better Act, with some modifications.
But what does this act do, and how will it affect businesses?
What is the Inflation Reduction Act?
The Inflation Reduction Act, which President Biden signed into law on August 16th, 2022, contains a $430 billion package that will:
- Fund climate and energy policies
- Reduce health insurance premiums, Medicare, and prescription drug prices, carrying forth initiatives from the Affordable Care Act (ACA)
- Impose a 15% corporate minimum tax for companies that make over $1 billion a year
- Give tax credits to businesses that invest in research and green technology
- Extend subsidies for ACA coverage for an additional three years
- Allow Medicare to negotiate the price of select pharmaceutical drugs
Senate Democrats estimate this bill will raise $737 billion in revenue over the next decade from corporate taxes, prescription drug pricing reform, and more audits of wealthy tax evaders. After accounting for investments in green energy and health care spending, the legislation is supposed to reduce the deficit by $300 billion in ten years.
How Businesses Will Be Affected
While at face value, the new law seems to be targeting the richest of the rich, it will also impact small businesses. Here’s how:
Business Tax Policy
Tax provisions are the primary way businesses will be affected by the new law. However, the extent of this effect differs based on the business type.
Businesses underpaying their taxes could soon experience a wake-up call in the form of an IRS audit. The Internal Revenue Service (IRS) has been struggling the past few years thanks to outdated technology, staffing woes, and COVID relief programs pushing the government agency to its limits.
With this new act, the government aims to get the IRS back to tip-top status with $80 billion to hire staff and enhance tax enforcement. While this increase in funds will likely mean we all get our tax refunds processed faster, it also means that more businesses (and taxpayers) will be audited, although both Treasury Secretary Janet Yellen and IRS Commissioner Chuck Rettig have stated that IRS audit rates won’t increase for businesses or individuals with less than $400,000 in annual revenue.
Companies of all sizes may face penalties for underpaying their taxes or filing improperly. If the IRS determines that you were negligent with your tax filings or disregarded the rules, they can apply an accuracy-related penalty of up to 20%.
Publicly Traded Businesses
This bill enacts a 1% fee on stock buybacks. A stock buyback is when a public company purchases shares of its own stock on the open market, reducing supply and driving up the cost.
Startups and other new businesses that don’t have a lot of income (because they’re spending their money on research and development) can get a credit of $250,000 applied to their Medicare payroll taxes. To qualify, you’ll have to make less than $5 million in gross receipts and be in business for less than five years.
There was already a $250,000 credit for these companies that went toward Social Security payroll taxes. So, if you take advantage of this new credit, you could get up to $500,000 in payroll tax credits.
Corporations that make $1 billion or more yearly will be hit with a new tax rate of 15% on book income. This may close some federal tax breaks, rebates, carried interest, and other past loopholes that large corporations took advantage of. The new law will also limit the amount of losses a business can claim on taxes, continuing a provision from Trump’s Tax Cuts and Jobs Act of 2017. That means your taxable income (and therefore taxes!) will be higher.
Group Health Insurance
The bill's latest version allows Medicare to negotiate the price of select pharmaceutical drugs beginning in 2026. Lower prescription drug prices for Medicare beneficiaries could increase drug costs for group health insurance plans (which employers sponsor) as drug makers look to recoup their lost profits.
One of the main provisions of the new legislation is to extend the subsidies for Affordable Care Act coverage for an additional three years. If you have less than 50 employees (which means you’re not required to offer health insurance to your team), then they will be able to continue getting coverage via the ACA.
While at face value, extending ACA subsidies seems to benefit individuals more than companies, it can also help lower your workers’ comp claims. How’s that, exactly?
If more people get and stay on health insurance, they have a better chance of combating illnesses and dealing with injuries before they affect their work lives. They’ll be less prone to workplace injuries and generally more productive on the job. This can ultimately reduce workers’ compensation claims.
You can also make workers’ comp easier to deal with by using Hourly. The platform automatically connects workers’ comp with your payroll data, so you only pay for the coverage you need.
Finally, Biden’s new law offers or extends several federal tax credits to companies that invest in clean energy, such as electric vehicles and energy-efficient buildings that reduce their carbon emissions. Some highlights include:
- A tax credit of up to $7,500 for businesses that purchase “qualified commercial clean vehicles” between January 1, 2023 and December 31, 2032.
- New business tax credits for companies that produce clean electricity or clean fuel or invest in clean electricity property
The administration hopes that some of these incentives can help combat climate change. Qualifying and claiming these credits can be complex, so it’s a good idea to discuss them with your tax advisor.
Is this Bad News for My Business?
Now that we know what the Inflation Reduction Act is and the implications for businesses of all sizes, you may wonder if this is bad news for your business. Although no one can know anything for sure, it looks like things will be just fine.
Most small businesses or working families won’t be affected as the bill is not funded by tax increases on small businesses under $400,000. Eighty-six percent of small business owners in the U.S. make less than $100,000 per year.
Top economists also supported this legislation, writing, “These investments will fight inflation and lower costs for American families while setting the stage for strong, stable, and broadly-shared long-term economic growth.”
However, Republicans have criticized the legislation, with Senate Republican leader Mitch McConnell saying the law will not do enough to combat high prices.
The Bottom Line on Biden’s Act
While the main target of the Inflation Reduction Act is billion-dollar corporations, small businesses will also be affected–with potential tax credits to gain…though they may see higher health insurance costs.
Because the legislation won’t affect the bulk of middle-class families and small businesses, house democrats and economists broadly support it, to the dissatisfaction of many Republicans.
The irony of it all? The Congressional Budget Office (CBO) says the bill won’t make a noticeable dent in inflation, shifting it to 0.1% lower or higher than current rates.