How Does the Inflation Reduction Act Apply to S-Corps?

What is the Inflation Reduction Act of 2022?

Like most new laws, there is a plethora of opinions surrounding it. Regardless of a political opinion on the Inflation Reduction Act, many people just want to cut through the legal jargon and find out how this new law affects them personally or their small business. We at s-corp.biz are here to answer those questions and find out if and how the Inflation Reduction Act will apply to S-Corp small business taxes. Our CPA firm specializes in accounting for small businesses. Our top priority is our clients and knowing exactly how and when any new law may impact their small business.

The language used in and about the Inflation Reduction Act, such as corporate tax increases, stock buyback taxes or increased IRS funding may understandably make some small businesses owners a little nervous, but thankfully we’re here to explain what those things mean and ultimately give good news to the average small business owner because the Inflation Reduction Act is really aimed at helping small businesses, S-Corps, and middle class Americans. Let’s dig into some of these topics and find out if and how they affect your small business.

Inflation Reduction Act- New Corporate Tax Impact on S-Corps

The Act sets a 15% minimum corporate tax for applicable large corporations earning more than $1 billion in profits.

S-Corp Impact

This new corporate tax rate does not apply to small businesses and S-Corps are not considered an applicable corporation. It will only raise taxes on around 150 corporations earning more than $1 billion in profits and paying less than 15% in federal taxes. However, it should bring in more than $300 billion in tax revenue. Small businesses regularly pay a higher percentage of profit in taxes than mega corporations who have the resources to avoid taxes. Many small businesses owners see this new corporate tax as a win since it helps to level the playing field between average American small businesses and large public corporations.

Inflation Reduction Act- Corporate Stock Buyback Tax Impact on S-Corps

The Act imposes a nondeductible 1% excise tax on the fair market value of corporate stock buybacks by a “covered corporation.” It is effective for stock purchased after December 31, 2022 and provides for several exceptions to the excise tax.

S-Corp Impact

“Covered corporations” generally refers to any domestic corporation, excluding S-Corps. So the short answer- no this new excise tax does not affect small business owners. The goal of this tax is to encourage large public corporations to invest rather than enriching CEOs or funneling profits tax-free to shareholders.

Inflation Reduction Act- IRS Funding Impacts on S-Corps

The Inflation Reduction Act provides $80 billion in IRS funding. This funding is directed at tax enforcement and seeking past revenue from wealthy taxpayers and large corporations as well as upgrading IRS technology and infrastructure.

S-Corp Impact

The funding and enforcement is not directed towards middle America or small businesses. Similar to the Corporate Tax addressed above, the IRS funding is directed at large corporations and wealthy taxpayers making more than $400,000. This was reinforced by the current IRS Commissioner Charles Rettig (a Trump appointee) who in a letter of support for the additional funding, stated, “these resources are absolutely not about increasing audit scrutiny on small businesses or middle-income Americans.” Many IRS offices are still using outdated technology from the 1970, and the additional funding will hopefully help the current audit disparity and enable the IRS to go after the bigger fish rather than being forced to go after smaller fish like small businesses.

Inflation Reduction Act- Health Care Affordability Impacts on S-Corps

The Act aims to lower prescription drug costs by phasing in out-of-pocket caps and giving Medicare negotiation power for high-cost drugs while imposing a rebate on drug manufactures when they raise prices faster than inflation. The Act also extends health insurance premium subsidies for those who benefit from the Affordable Care Act and locks in lower monthly premiums previously provided by the American Rescue Plan.

S-Corp Impact

According to a recent Small Business for America’s Future survey, 83% of small business owners said rising health insurance costs have negatively impacted their business, forcing them to raise prices and holding back their growth. Additionally, more than half of all healthcare marketplace participants are small business owners, employees or self-employed entrepreneurs. Subsidies established by the American Rescue Plan were set to expire this year, but the Inflation Reduction Act extends these to 2025. The lower cost of health insurance through premium subsidies will likely benefit many small businesses.

The prescription drug measures mainly affect individuals, particularly seniors, in a positive way and large pharmaceutical companies in a negative way, but some economists speculate that the measures to lower prescription drug costs may incite innovation and investment in new products that replace large pharmaceutical products, which could have a positive impact on small businesses in the long run.

Inflation Reduction Act- Energy Efficient Incentives Impact on S-Corps

The Inflation Reduction Act establishes a whole variety of incentives and projects geared towards emissions reduction, but we will focus primarily on the ones that directly or indirectly apply to businesses.

Up to 30% in tax credits for homeowners who replace current systems with energy efficient heating and cooling equipment or for energy efficient home construction projects with additional direct rebates for replacing home appliances with more energy efficient and electric appliances.
Small businesses can deduct up to $1.00 per square foot of their business for making high energy upgrades with an additional per square foot bonus if the upgrades are completed by workers who are paid a prevailing wage.
Tax credits on electric commercial vehicles up to $40,000 for vehicles over 14,000 pounds.
Extends tax credits up to $7500 for buying a new or used electric vehicle until December 2032 while setting new limits on price of vehicle, household income and North American assembly. Those limits are not all applicable to business vehicles.
Establishes provisions for the use of American-made equipment for clean energy production. Provides expanded clean energy tax credits for wind, solar, nuclear, clean hydrogen, clean fuels, and carbon capture.

S-Corp Impact

The energy efficiency incentives may be an opportunity for small businesses in a number or ways. In the direct sense, the Act may make it more feasible for small businesses to upgrade to more energy efficient equipment, which will reduce operating costs in the long term. Years of tax credits are available for small businesses or individuals who make energy efficient modifications or upgrades.

Additionally, in a less direct sense, the increased incentives for homeowners to complete energy efficient products and the provisions for other incentives requiring the products be assembled in America could very well lead to an increased demand for the products and services offered by many small businesses.

Note: Part of the funding for this bill comes from a tax increase on crude oil and imported petroleum products, which has raised concern as to whether this will increase gas prices. The increase is 16.4 cents per-barrel, which translates to the increase that will actually be passed on to the consumer being only $0.0039 cents per gallon. Therefore, it does not seem that this would have a noticeable effect on individuals or small businesses.

Inflation Reduction Act- Notable Tax Credit Increase for Small Businesses

The refundable research and development tax credit for small businesses is a credit that can be applied against payroll taxes and other expenses such as product development and technology. The credit was previously $250,000, but the IRA doubled this amount to $500,000.

S-Corp Impact

S-Corps are small businesses, and therefore the refundable research and development tax credit for small businesses is a major credit that is used by many small businesses. Doubling the amount will undoubtedly benefit many small businesses come tax season.

Takeaways

As a small business owner, we hope we were able to answer some of the big questions surrounding the Inflation Reduction Act and what it means for your S-Corp or small business. When the word corporation is being thrown around, it can be hard to know exactly what that means for an S-Corp, but as you can see, most of the new tax laws are directed at large public corporations, while actually providing a number of benefits to small businesses.

We’ve only scratched the surface of everything the Inflation Reduction Act outlines, but we at s-corp.biz are here for you and your small business to handle questions about current topics and handle all of your bookkeeping and accounting needs to guarantee that your small business is saving the most money and receiving all of the tax breaks you’re entitled to.