The Inflation Reduction Act (IRA) was signed into law by President Biden on August 16. It contains many provisions related to climate, energy, and taxes. There has been a lot of media coverage about the law’s impact on large corporations. For example, the IRA contains a new 15% alternative minimum tax on large, profitable corporations. In addition, the law adds a 1% excise tax on stock buybacks of more than $1 million by publicly traded U.S. corporations.
But there are also provisions that provide tax relief for small businesses, and here are two:
Currently, qualified small businesses can elect to claim a portion of their research credit as a payroll tax credit against their employer Social Security tax liability rather than against their income tax liability. This became effective for tax years that began after December 31, 2015.
Provision 1: A payroll tax credit for research
Qualified small businesses that elect to claim the research credit as a payroll tax credit do so on IRS Form 8974, “Qualified Small Business Payroll Tax Credit for Increasing Research Activities.” Currently, a qualified small business can claim up to $250,000 of its credit for increasing research activities as a payroll tax credit against the employer’s share of Social Security tax.
The IRA makes changes to the credit beginning next year. It allows qualified small businesses to apply an additional $250,000 in qualifying research expenses as a payroll tax credit against the employer share of Medicare. The credit can’t exceed the tax imposed for any calendar quarter, with unused amounts of the credit carried forward. This provision will take effect for tax years beginning after December 31, 2022.
A qualified small business must meet certain requirements, including having gross receipts under a certain amount.
Provision 2: Extension of the limit on excess business losses of noncorporate taxpayers
Another provision in the new law extends the limit on excess business losses for noncorporate taxpayers. A previous law placed a cap set on business loss deductions by noncorporate taxpayers. For 2018 through 2025, the Tax Cuts and Jobs Act limited deductions for net business losses from sole proprietorships, partnerships, and S corporations to $250,000 ($500,000 for joint filers). Losses in excess of those amounts may be carried forward to future tax years under the net operating loss rules. These excess amounts are adjusted annually for inflation.
The IRA extends the limit through 2028. The CARES Act initially suspended the limit for 2018, 2019, and 2020 tax years. Businesses with significant losses should consult with us to discuss the impact of this change on their tax planning strategies.
We can help
These are only two of the many provisions in the IRA. There may be other tax benefits to your small business if you’re buying electric vehicles or green energy products. Contact us if you have questions about the new law and your situation.