The term “inflation” is on everyone’s mind at the moment. So with the Inflation Reduction Act having been passed, it’s natural for business owners to sit up and take notice.
After all, inflation can have a big impact on businesses, both good and bad. Inflation can increase costs and eat into profits, making it harder to reinvest in the business or pay employees. But it can also spur economic growth and create new opportunities.
The Inflation Reduction Act is designed to do just that – reduce inflation and help businesses weather the ups and downs of the economy. But what will be the consequences in terms of the finances of businesses?
What is the Inflation Reduction Act?
President Joe Biden signed the Inflation Reduction Act into law on August 16, 2022. It’s a comprehensive bill that includes investments in healthcare, prescription drugs, climate change, and taxes on the wealthy.
According to a report by the Congressional Budget Office (CBO), the Inflation Reduction Act would reduce deficits by $305 billion through 2031. That includes over $100 billion of net scorable savings and up to $200 billion of gross revenue from stronger tax compliance.
CBO also finds that the Act would modestly reduce net spending by almost $15 billion through 2031. In 2031 alone, it would reduce spending by nearly $40 billion. And when fully phased in, the legislation would slightly cut net taxes by about $2 billion per year.
What does the Inflation Reduction Act do?
The Inflation Reduction Act has a number of provisions designed to reduce inflation and help businesses weather the ups and downs of the economy. Here are some of the key provisions:
#1. 15% corporate minimum tax rate:
The Inflation Reduction Act imposes a new 15% corporate minimum tax rate on corporations with at least $1 billion in revenue. In a case where the tax liability is less than the minimum tax, the corporation will be required to pay the difference.
#2. 1% excise tax on stock buybacks:
When a corporation purchases its own stock, it’s called a “stock buyback.” In a typical stock buyback, the corporation acquires shares from shareholders at a price above the current market value.
To discourage reckless stock buybacks – which can inflate stock prices and benefit shareholders without doing much to actually improve the company’s long-term health – the Inflation Reduction Act imposes a 1% excise tax on them.
#3. Prescription drug price reform:
Every year, Americans spend an average of $1,300 on prescription drugs, more than any other country in the world. The Inflation Reduction Act takes steps to address this problem by allowing Medicare to negotiate the price of certain prescription drugs.
Under this legislation, Medicare beneficiaries will have a $2,000 cap on annual out-of-pocket prescription drug costs, starting in 2025.
#4. IRS tax enforcement:
As part of the Inflation Reduction Act, the IRS will receive $80 billion in funding over the next ten years to help it enforce tax laws and collect taxes. This will help the agency to improve its tax compliance rate, which is currently estimated at 81.7%.
#5. Health insurance subsidies:
The Inflation Reduction Act extends health insurance subsidies through 2025. These subsidies, which help to lower premiums, were scheduled to expire at the end of 2022, but will now be extended for another three years.
#6. Climate change investments:
When it comes to climate change, the Inflation Reduction Act takes a two-pronged approach: it invests in clean energy and also incentivizes businesses to reduce their carbon emissions.
To that end, the Inflation Reduction Act includes $369 billion in incentives for renewable energy, including electric vehicles. It also extends tax credits for homeowners who purchase and install solar panels or energy–efficient products like water heaters, furnaces, and air conditioners.
A tax credit of up to $7,500 is available for the purchase of a new or used electric vehicle, and this credit is set to continue until December 2032. In addition, there are new limits on the price of a vehicle, household income, and North American assembly-though not all of these limits apply to business vehicles.
The Act also provides tax credits on commercial electric vehicles that are over 14,000 pounds. These credits can be as high as $40,000 per vehicle.
What Does the Inflation Reduction Act Mean for Businesses?
Whether you’re a small business owner or the CEO of a Fortune 500 company, you will feel the impact of the Inflation Reduction Act in some way. Here are some of the key ways that businesses will be affected by this legislation:
#1. Small businesses will benefit from a level playing field:
The Inflation Reduction Act’s 15% corporate minimum tax rate applies to companies with at least $1 billion in revenue. This is meant to level the playing field for small businesses, which have been at a disadvantage compared to larger corporations in recent years.
#2. Electric vehicles will become more popular:
Since the Act provides tax credits for the purchase of electric vehicles, we can expect to see more businesses making the switch to electric. In addition, the new limits on the price of electric vehicles will make them more affordable for businesses of all sizes.
#3. Companies will be incentivized to reduce their carbon emissions:
As part of its climate change strategy, the Inflation Reduction Act incentivizes businesses to reduce their carbon emissions. This will help to reduce greenhouse gas emissions, and it will also create opportunities for businesses that are able to develop innovative technologies to help other companies meet their emissions targets.
#4. Health insurance subsidies will help businesses save money:
Like individuals, businesses will benefit from the Inflation Reduction Act’s extension of health insurance subsidies. These subsidies can help businesses save money on their premiums, freeing up funds to invest in other areas of their business.
The Inflation Reduction Act is a wide-ranging piece of legislation that will significantly impact businesses, large and small. From electric vehicles to climate change, this law will shape the business landscape for years to come.
If you have any questions about how the Inflation Reduction Act will affect your business, please don’t hesitate to contact us. Our team of highly skilled accounting professionals at Cg are happy to help you navigate this legislation and advise on the best way to move forward.