How the Inflation Reduction Act Affects Small Businesses and the Working Class

Two weeks ago, the Senate passed one of the most significant pieces of legislation for American families and businesses in recent years. When Biden signed the Inflation Reduction Act of 2022 into law on August 16, 2022, it immediately became one of the most consequential pieces of economic legislation–fiscally speaking–in the last decade.

Overview of the Inflation Reduction Act

The American economy currently faces a few significant challenges:

• Skyrocketing inflation has reached a 40-year high.
• Labor shortages impact businesses of all sizes.
• High interest rates, increased consumer prices, and geopolitical conflict cause stock market uncertainty.
• High gas prices are taking a toll on family budgets.

The Inflation Reduction Act (IRA) aims to address these difficulties by raising taxes on the country's largest businesses, lowering the cost of prescription drugs, and investing in domestic energy production while also promoting clean energy. And provided the law remains in effect, it's set to reduce greenhouse gas emissions by 31% to 44% below 2005 levels in 2030.

Let's examine how the new law will impact different areas of the economy:

Inflation and Taxes

The IRA will impose a minimum 15% tax on all corporations generating over $1 billion ARR. This is coupled with a 1% excise tax on corporate share buybacks and $80 billion in additional annual spending for the IRS to help close the tax gap.

The result? According to Congressional Budget Office estimates, the legislation would increase tax revenue by $300 billion over the next decade and reduce the net deficit by $102 billion–a significant victory for lawmakers looking to get our fiscal house in order.

Increased taxation for enterprises levels the playing field for small businesses.

Small businesses and working-class families, which often shoulder a larger tax burden, will benefit from the increased competition and decreased pressure to keep up with larger businesses. The Inflation Reduction Act itself will only impact about 150 companies, but these companies represent a major portion of the economy.

Historically, these companies haven't paid their fair share of taxes, instead leveraging tax breaks that small businesses rarely get to enjoy. Amazon, for example, paid 6.1% on $35.1 billion in profits. And at least two years, Amazon paid $0 in federal taxes.

More money for IRS enforcement increases pressure on big businesses.

Lots of people fear the IRS, but the reality is that they only audit a small percentage of taxpayers. So if you're worried about federal agents coming after you for writing off school supplies you bought for your children, you can rest easy.

That said, it's no surprise that many small business owners and their families feel this way. Historically, the IRS has targeted smaller businesses while letting larger businesses off the hook.

But a major contributor to that problem has been a lack of funding. The Inflation Reduction Act will provide an additional $80 billion for IRS enforcement over the next decade, which means we can expect to see more audits of large businesses–and hopefully a more level playing field for small businesses and working families as a result.

Small business owners will enjoy increases in one critical tax credit.

Not only does the IRA level the playing field, but it also provides some targeted tax relief for small business owners in the form of increased research and development (R&D) tax credit. The R&D tax credit is a major incentive for businesses to invest in new products, processes, or software.

In the past, the R&D tax credit has been used to develop everything from life-saving drugs to energy-efficient light bulbs.

The IRA will increase the R&D tax credit from $250,000 to $500,000. Businesses can use it for things like employee payroll, equipment, and contract research.

Healthcare

The Affordable Care Act (ACA) was a major healthcare reform bill passed by the United States Congress in 2010. Among other things, the ACA mandated that all Americans have health insurance, and it provided tax credits to small businesses to help them afford coverage for their employees.

The Inflation Reduction Act extends ACA subsidies through 2025, which will help small businesses continue to provide health insurance for their employees and themselves without breaking the bank.

The Inflation Reduction Act also contains provisions to lower prescription drug prices. One way it does this is by allowing Medicare to negotiate directly with drug companies–and it limits Medicare recipients' expenditures to $2,000/year.

Small business owners and their employees will have more affordable healthcare.

The ACA subsidies that made healthcare more affordable were set to expire at the end of 2022. These subsidies made healthcare more affordable for nearly 90% of the 14.5 million people who received health coverage through federal marketplaces.

In 2021, families saw an average monthly savings of $67 per person, and 80% of people could find health coverage for under $10 per month.

These exchanges were disproportionately used by small businesses, their employees, and self-employed individuals. Without these subsidies, their premiums would skyrocket.

Families will have access to more affordable drugs.

Families can afford to fill prescriptions and stay healthy with increased access to affordable drugs. This is especially important for small business owners and working-class families, which often have to choose between paying for health insurance and other necessities like food and rent.

It's no secret that prescription drugs are grossly overpriced in the United States. Starting with ten drugs in 2026, the Inflation Reduction Act will help to bring those prices down by allowing Medicare to negotiate directly with drug companies and capping Medicare recipients' out-of-pocket expenditures at $2000/year.

This is a huge win for small business owners and their employees, who will soon be able to afford the prescription drugs they may have struggled with before.

Climate Change

One of the most significant opportunities that the IRA offers families and small businesses is the incentives for renewable energy. These incentives include:

• Homeowners Clean Energy Tax credits for new solar customers and those who upgrade to energy-efficient HVAC systems and other home products and appliances
• Tax credits for the purchase of new and used electric vehicles
• Tax credits on commercial vehicles and fleets

Each of these things makes it easier for small businesses to invest in the future and save money on energy costs. For some sectors, they also create some opportunities for more business.

Families can invest in new home technology without breaking the bank.

When it comes to energy efficiency, most families find themselves in a Catch-22 situation. Installing solar panels and energy-efficient home systems is one of the best ways to save money on a recurring expenditure–their gas and electric bill.

And with gas prices continuously rising, purchasing an electric vehicle eliminates the dependence on Big Oil for transportation. But the high upfront costs of these things often make it difficult for families to take advantage of them, even when they know it would save them money in the long run.

Within the IRA's $369 billion in incentives for renewable energy are tax credits for those who purchase new solar panels and energy-efficient home systems.

For families who want to invest in EVs, the IRA extends the $7,500 tax credit for purchasing new electric vehicles to 2032, although this does not apply to business vehicles.

Businesses can invest in energy-efficient fleets.

For vehicles over 14,000 pounds, the IRA includes up to a $40,000 tax credit on the purchase of energy-efficient commercial vehicles.

With 27% of greenhouse gases coming from the transportation sector and the increasing popularity of corporate sustainable initiatives, this is a great way for businesses to invest in their future and do their part to reduce emissions.

Companies in some sectors will uncover new business opportunities.

With more widespread investment in clean energy, many business sectors will be able to capitalize on increased market demand for their services.

Homeowners who install energy-efficient home energy products, for example, almost always hire a small business or local contractor to do the job. And since many of the law's provisions require these products to be sourced domestically to qualify, small manufacturers and suppliers for related products should also see increased demand and, therefore, revenue.

Many businesses are already adopting EV technology as quickly as they can for the cost savings and sustainability benefits, but the IRA's tax credits will help to accelerate that process. For companies that rely heavily on last-mile delivery speed and fuel efficiency, this is a great way to improve their bottom line while also reducing emissions.

The Bottom Line

The Inflation Reduction Act creates many new advantages and opportunities for small business owners and working families, two large groups of Americans who have historically existed in the shadow of large businesses that pay little in taxes.

If you're a small business owner, this new law provides many benefits to you and your family, but it's important to know all your options.

If you're a business owner and need 1-1 help with funding and growing your business, click here to speak with a member of our team of funding experts.