The Inflation Reduction Act, passed in August 2022, is considered to be the largest investment into climate change and energy modernization in American history. The sweeping bill includes 755 pages of tax changes, regulations, credits and incentives — all aimed to curb inflation and reverse the recession, encourage cleaner energy usage and lower overall energy costs.
While much of the bill applies mainly to large corporations, energy companies and pharmaceutical companies involved in the Medicare program, a number of changes, credits and incentives do apply to everyday small businesses.
If you run a main street business or startup, there are four main Inflation Reduction Act measure you need to know about.
These four measures are expected to have the greatest impact your business’s day-to-day operations:
1. An extension of the Affordable Care Act
The bill includes a measure to extend the Affordable Care Act subsidies that help individuals purchase premium health insurance through the health care marketplace. With these premium subsidies extended through 2025, millions of businesses owners, employees and self-employed entrepreneurs will have expanded access to affordable insurance through advanced-payment tax credits.
This measure is expected to have far-reaching benefits. In a survey by Small Business for America’s Future (a coalition of business owners and leaders), fully 83% of respondents agreed rising health insurance costs have hurt their business — causing them to raise prices while dampening their growth. On average, this Inflation Reduction Act measure is expected to save each enrollee as much as $800 per year. That reduces small businesses’ overhead, allowing them to retain their talented workforce and improve margins.
2. Greater funding for clean, domestic energy
While this provision may not have an immediate impact on every small business, energy independence is crucial for your long-term bottom line. By reducing the United States’ reliance on foreign energy sources, global unrest and natural disasters are expected to have a smaller impact on energy costs. That protects small businesses across the country from unexpected and bank-breaking energy costs when they need fuel and electricity most.
The clean energy-related provisions also include incentives and tax credits that some small businesses may be eligible to take advantage of, including:
- Tax incentives available for businesses that use lower-carbon and carbon-free energy sources.
- Credits for businesses that invest in wind, solar and geothermal energies.
- Incentives for companies that manufacture steel, iron and other inputs in the U.S.
- Tax credits for commercial buildings that become more energy efficient.
- Tax credits for businesses that make zero-emissions technology, like electric forklifts and solar-powered equipment.
3. Double the refundable research and development tax credits
The research and development tax credit, designed to incentivize companies that use research to innovate and improve, doubled from $250,000 to $500,000. This credit can be used by a wide variety of small businesses, from tech and manufacturing businesses to service-based B2Bs and small-scale productions. Even startups can benefit from this credit, applying the credit to payroll taxes and other expenses for up to five years.
According to some CPAs who service venture capital-backed startups, this is the most important tax credit for startups because it allows even unprofitable businesses to offset their payroll taxes and improve cash flow.
As long as a portion of your startup’s R&D is specific and defined, focused on advancing the science of your business, service, or product, and related to a hard science (including chemistry, biology, engineering, computer science, or software engineering), you may be eligible to apply this expanded credit.
4. Dozens of tax incentives and credits for individual taxpayers who “go green”
The Inflation Reduction Act includes multiple measures that encourage individuals to reduce their carbon footprint, including:
- A 30% tax credit on energy efficiency upgrades to your home, like installing better insulation, exterior doors and windows.
- A 30% tax credit (up to $2,000) for installing energy-efficient home systems, including heat pumps and biomass stoves and boilers.
- Another 30% tax credit for equipment that uses renewable energy, like solar panels and wind or geothermal-powered equipment.
- A variety of rebates for electric home upgrades, like installing an electric stove, clothes dryer or water heater.
- Up to a $7,500 tax credit (plus additional state-level tax incentives) for purchasing a new electric vehicle.
How do these incentives impact small businesses and startups? By greatly reducing the cost to customers. And that accelerates the entire industry. Small businesses that produce the parts needed to build these energy-efficient systems, businesses that sell or service the products, contractors, architects, interior design firms, car dealerships — all these industry players stand to benefit from the greater demand sparked by widespread cost reductions.
Best of all, many of these tax incentives are designed to be available for a decade or longer. That means your small business or startup (and your investors) can make well-informed decisions about your production, growth trajectory and marketing strategy.
When in doubt, talk to your tax professional
The Inflation Reduction Act is a lengthy, complicated bill with numerous tax-related measures that require careful interpretation. If you believe a credit or incentive will apply to your small business or startup, always meet with a tax professional to verify the requirements and details before you change your day-to-day operations. This overview is intended to be an overview of the most beneficial measures of the bill — not a replacement for professional guidance.