The Inflation Reduction Act (IRA), signed into law by President Biden on August 16, contains many provisions related to climate, energy and taxes. There has been a lot of media coverage about the law’s impact on large corporations. For example, the IRA contains a new 15% alternative minimum tax on large, profitable corporations. And the law adds a 1% excise tax on stock buybacks of more than $1 million by publicly traded U.S. corporations.
But there are also provisions that provide tax relief for small businesses. Here are two:
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.
Another provision in the new law extends the limit on excess business losses for non-corporate taxpayers. Under prior law, there was a cap on business loss deductions by non-corporate taxpayers. For 2018 through 2025, the Tax Cuts and Jobs Act limited deductions for net business losses. This limitation applied to sole proprietorships, partnerships and S corporations to $250,000 ($500,000 for joint filers). Losses in excess of those amounts may be carried forward to future tax years under the net operating loss rules. These losses are also adjusted annually for inflation.
Although another law (the CARES Act) suspended the limit for the 2018, 2019 and 2020 tax years, it’s now back in force. An extension is now in place through 2028 by the IRA. Businesses with significant losses should consult with us to discuss the impact of this change on their tax planning strategies.
These are only two of the many provisions in the Inflation Reduction Act. There may be other tax benefits to your small business if you’re buying electric vehicles or green energy products. Contact us if you have questions about the new law and your situation.