How the Inflation Reduction Act affects small businesses and entrepreneurs

1st Sep 2022

capitol building with beautiful sky
  • The bill does not raise taxes on small businesses or any individuals making under $400,000 a year
  • The legislation is largely funded through a 15% minimum tax aimed at companies that earn more than $1 billion a year
  • High-income small business owners can hold onto more of their income quickly and save on taxes by opening a Defined Benefit or Cash Balance plan during this period of high inflation

The Inflation Reduction Act was recently signed by President Joe Biden into law to address inflation, global warming and health care costs. The $770 billion bill includes tax and financial provisions that will impact small business owners and entrepreneurs.

The legislation involves at least $260 billion in spendingover 10 years, but it also would raise taxes by $326 billion in the same period, according to the Joint Committee on Taxation, a nonpartisan congressional commission. One of the benefits of this bill is that it does not raise taxes on small businesses or any individuals making under $400,000 a year, but instead makes investments to these taxpayers.

The new bill takes aim at reducing the deficit through taxes on the largest corporations and lowering health-care costs on prescription drugs. It also invests $80 billion to the Internal Revenue Service’s tax enforcement that includes hiring of 87,000 new IRS agents to help with audits. The legislation is the largest-ever investment to combat climate change. If future legislature does not reverse these provisions, the U.S. will be able to dramatically reduce its greenhouse gas emissions by the end of the decade. The bill also will help an estimated 13 million Americans pay for health care insurance by extending subsidies provided during the pandemic.

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Here’s how the Inflation Reduction Act will affect small business owners and entrepreneurs:

Health Insurance Benefits

Small business owners say rising health insurance costs have negatively impacted their business, forcing them to raise prices and hold back their growth. The legislation extends the Affordable Care Act’s premium subsidies through 2025 and lowers prescription drug prices. More than half of all healthcare participants are small business owners, employees, or self-employed entrepreneurs.

Tax Incentives for Renewable Energy 

The bill aims to reduce greenhouse gas emissions and invest in clean energy technologies by encouraging renewable energy adoption. Many small businesses have felt the effects of extreme weather that have financially impacted their businesses. Under the new bill, small busi­nesses can receive a tax credit that covers 30 percent of the cost to change to less expensive solar power that cuts operat­ing costs and protects against volatile energy prices. Small business­es will be able to deduct up to $1 per square foot of their business for making high energy efficien­cy upgrades.

Tax Reform

The bill is largely funded through a 15% minimum tax aimed at companies that earn more than $1 billion a year and is expected to bring the federal government more than $300 billion in tax revenue while eliminating tax loopholes. Taxes on individuals and households won’t be increased. Stock buybacks by corporations will face a 1% excise tax. The 15% minimum tax on large corporations helps level the playing field, making the situation more equitable for small businesses.

Retirement Tax Savings Options for Small Businesses and Entrepreneurs

The Inflation Reduction Act won’t help save with inflation immediately, but the bill is making small steps to help bring inflation back to normal levels. If you’re a high-income small business owner or an entrepreneur, you can hold onto more of your income quickly and save on taxes by opening a Defined Benefit or Cash Balance plan during this time of high inflation. These plans can help accelerate retirement savings, allowing for very large contributions and can potentially lower taxable income by $100,000 or more.

Here’s how to get started with opening a Defined Benefit or Cash Balance plan.

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