Inflation Reduction Act: Impact on Small Businesses & Tax Benefits

The Inflation Reduction Act, introduced by U.S. President Joe Biden, has garnered support from Democrats but faces strong opposition from Republicans. The Internal Revenue Service recently issued a statement encouraging businesses to capitalize on tax-saving opportunities and to be prepared for reporting changes taking effect in 2023.

The Act is being highlighted during National Small Business Week, which takes place from April 30th to May 6th this year. Democrats argue that the Act provides several benefits to small business owners in multiple ways. Since being enacted last summer, the Inflation Reduction Act has offered a variety of provisions that help small business owners reduce their energy expenses. One such measure is a tax credit that covers 30% of the cost of transitioning to affordable solar power, ultimately reducing operational expenses and protecting businesses against fluctuating energy prices.

U.S. Vice President Kamala Harris has long been an advocate for using green energy in both residential and industrial settings. At a recent Inflation Reduction Act Climate Event, she emphasized the unsustainability of relying on fossil fuel-based electricity and discussed the administration’s commitment to investing in clean energy production, including the construction of wind turbines and solar farms.

In addition to the tax credit for adopting solar power, small business property owners can also benefit from a tax credit of $5 per square foot to support energy efficiency improvements. This credit can lead to reduced utility bills for businesses. The Clean Commercial Vehicle Credit is another provision in the Act, providing small businesses that operate vehicles like trucks and vans with tax credits covering up to 30% of the purchase cost for eco-friendly commercial vehicles, including electric and fuel cell models that meet specific criteria. Companies can claim an unlimited number of these credits.

Entrepreneurs and business owners can potentially access a wide array of tax benefits, ranging from deductions for start-up expenses and home office costs to provisions for qualified business income and health insurance deductions designed specifically for self-employed individuals. These tax advantages offer a diverse range of financial relief options for business owners.

However, the Act has faced strong criticism from Republicans and some experts. One of the primary concerns is the 1% tax that will be levied on corporate share buybacks. Another contentious point is the Act’s proposal of a 15% tax on firms that report more than $1 billion in their annual financial statements, which may often be significantly higher than the corporation’s taxable income.

Opponents also point to the increase in funding allocated to the IRS as a potential issue, arguing that it will result in a higher number of audits for small businesses. This increase in audits could lead to ballooning legal fees for these businesses in the coming years. Furthermore, while green energy is more environmentally friendly, the initial expense for businesses to switch to renewable energy sources may be higher than their previous fossil fuel-based costs.

Sen. Joni Ernst, R-Iowa, has expressed strong disapproval of the Act and its potential impact on small businesses on her website. Citing data from the U.S. Census Bureau’s Statistics of U.S. Businesses, Ernst noted that small businesses with approximately five employees have average receipts exceeding $424,000. She contends that small businesses will be disproportionately affected by increased enforcement efforts and instead advocates for tax solutions that promote growth and economic competitiveness. 

“Instead of commencing a witch hunt on small businesses by enhancing audit rates without justification, we should focus on tax solutions that promote small business growth and economic competitiveness,” Ernst wrote in a letter to the IRS.