2022 Inflation Reduction Act & Taxes – What Business Owners NEED to Know
8 min read
September 22, 2022 • Block Advisors
In August the Inflation Reduction Act, in part a new tax bill for 2022, was signed into law. The legislation covered a myriad of topics that may impact your small business or you as a business owner. This includes sections dealing with health insurance, green vehicles, research investment, energy-efficient homes, and even business losses. Read on to learn more.
As an entrepreneur, full-time freelancer, or small business owner, health insurance is probably a significant expense in your personal budget. The Inflation Reduction Act extends the Premium Tax Credit (PTC) healthcare provisions from the 2021 American Rescue Plan Act through 2025.
This credit reduces the maximum amount you pay for marketplace health insurance, calculated as a percentage of your taxable income. These percentages are determined using the annually updated Federal Poverty Guidelines. Though businesses themselves are not able to claim this credit, small business owners may be able to claim it for themselves and their families, if they qualify.
|Federal Poverty Level||Household Income You Pay|
|Up to 150%||0%|
|150 – 200%||0 – 2%|
|200 – 250%||2 – 4%|
|250 – 300%||4 – 6%|
|300 – 400%||6 – 8.5%|
|400% and above||8.5%|
*Percentage rates are fixed and will not be indexed for inflation
Simply identify your household size, then use that threshold and the chart above to determine your final marketplace health insurance cost ceiling. For example, in 2022 the poverty guideline for a household of three in the contiguous United States was $23,030. If your household income was $64,000 this year, you would be at ($64,000/$23,030) x 100% = 278% of the Federal Poverty Level. Your marketplace healthcare would max out at 6% of your household income, or $64,000 x 0.06 = $3,840 per year ($320 per month).
If you purchased qualifying property to refuel or recharge an alternative fuel vehicle for your business, you may be able to take advantage of this clean energy tax credit. For the 2022 tax season, the credit provides either 30% or $30,000 of the costs associated with putting the property into service at your business if subject to depreciation – whichever is less. Just make sure to keep records related to your purchase and use of the alternative fuel refueling property!
For example, consider Todd, the owner of a small grocery store, who decided to install electric vehicle recharging stations in their parking lot at a cost of $80,000. $80,000 x 0.30 = $24,000. Their credit will be for this amount since it is less than $30,000.
Heads up – the IRS rules change starting in 2023 and going to 2032. Make sure to discuss those future updates with your tax pro to ensure your business remains in a favorable tax position.
This credit for businesses and individuals tweaks the existing Clean Vehicle Credit. The modified credit has two parts, which can be combined for up to a $7,500 maximum:
· A credit of up to $3,750 for vehicles meeting a critical minerals requirement
· A credit of up to $3,750 for vehicles meeting a battery components requirement
There are several caveats to this credit to consider:
· Plug-in electric vehicles with at least 7 kW hours of battery life and all fuel cell vehicles qualify
· The vehicle must have been assembled in North America AFTER August 16, 2022
· The purchase price of the vehicle can’t exceed $80,000 (vans, SUVs, pickups) or $55,000 (all other types)
· The mineral and battery component percentages increase yearly until 2029 – if you are considering purchasing in the future, make sure the vehicle meets the current requirements
· High-income individuals may not qualify for the credit
For example, if Sandra purchased a qualifying electric vehicle that met the battery component requirement but NOT the critical minerals requirement, they would be limited to a $3,750 credit.
This credit can only be claimed once every three years and covers 30% of the vehicle purchase price, up to a $4,000 limit. As with the Credit for Plug-in Vehicles, high-income earners may not qualify. If you’re buying a used electric vehicle at least two years old, the purchase price is limited to $25,000 or less. Finally, the credit can only be claimed for vehicles sold by a dealer and on the first transfer. Work with your seller to make sure the used electric vehicle you are purchasing will qualify for this credit.
For example, if Jo purchased a three-year-old electric vehicle for $20,000 from a local dealer their credit would be $4,000 (since 30% of $20,000 = $6,000 – exceeding the max cap).
If you use a green vehicle for your business, it may qualify for this credit! The credit is the lower of 15% of the vehicle’s cost (30% for a non-gasoline or diesel engine) OR the incremental cost between it and a comparable vehicle powered solely by a gasoline or diesel engine. The maximum credit PER vehicle with weight ratings under 14,000 pounds is $7,500, or $40,000 for heavier vehicles. Your clean fleet may just provide a huge tax advantage!
For example, Pat owns an environmentally friendly moving company and has committed to only using electric vehicles for their fleet. Their moving trucks weigh over 14,000 pounds and cost them $100,000 each, compared to $50,000 for a similar gas-powered truck. So, they are eligible for the lesser of 30% of 100,000 = $30,000 or the incremental cost $100,000 – $50,000 = $50,000 – they would qualify for a $30,000 tax credit.
Schedule a meeting with a Block Advisors professional today to discuss how these changes may impact your tax rate, tax breaks, and bookkeeping this year.
This credit will be especially useful to some small businesses’ payroll taxes. The current tax law allows qualifying small businesses (less than 5 years old and less than $5 million in gross receipts) to use up to $250,000 of the research credit towards their social security payroll tax liability. The new updated version allows these small businesses to use an additional $250,000 of research credit towards their Medicare tax liability. If your small business hasn’t had enough income tax liability in the past to fully utilize the research credit, that may change now with the new tax policy.
This 2021 credit is now extended for homes acquired BEFORE January 1, 2023. After this date, a few modifications apply:
· The credit amount increases to $500 – $1,000 for multi-family dwellings
· The credit amount increases to $2,500 – $5,000 for single-family homes
· The final amount depends on the energy-efficient features of the structure
For eligible contractors who sell or lease new energy-efficient homes, this credit could result in a significant reduction in your tax rate. If you think you qualify for this credit for tax purposes, be sure to consult your tax pro to clarify the requirements and details.
If you own a multifamily building that serves at least 50% low- to moderate-income households, you may benefit from up to $14,000 of rebates for high-efficiency electric home upgrades such as:
· Up to $1,750 for a heat pump water heater
· Up to $8,000 for a heat pump for space heating and/or cooling
· Up to $840 for an electric stove, cooktop, range, oven, or clothes dryer
· Up to $4,000 for an electric load service center upgrade
· Up to $1,600 for insulation, air sealing, and ventilation improvements
· Up to $2,500 for electric wiring
Commercial entities carrying out qualified projects on behalf of low- or moderate-income households also qualify. It is important to note that this is NOT a tax event, however.
Originally, this was planned to sunset in 2025, however, it was extended by the American Rescue Plan Act through 2026. Now, the Inflation Reduction Act further pushes that date through to the 2028 tax year. So, who is subject to the Excess Business Losses limitation and what does it entail? This rule applies to non-corporate income taxpayers, such as sole proprietorships, partnerships, and unincorporated LLCs. It prevents a business from claiming a loss exceeding $270,000 for single filers or $540,000 for married joint filers (in 2022). While this limitation was put on hold during the pandemic to help impacted small businesses, it is now back in full effect. The rules surrounding Excess Business Losses are complex, even for large corporations – make an appointment to discuss your unique situation with a Block Advisors Tax Pro.
If you own a small business, the Inflation Reduction Act has the potential to influence your tax rate this year, and in the future, as both a personal income taxpayer and a small business owner. Let a Block Advisors tax professional help you navigate these tax changes, and other tax laws, to get the best tax outcome for your small business. Learn more today about how Block Advisors can help you and your business.