One of the possibly more intimidating numbers to hear come out of the Inflation Reduction Act is that an additional $80 billion will be invested into the IRS. This money will be implemented over a ten-year period in which the IRS hopes to hire an additional 80,000 personnel, doubling their current workforce. With this additional funding and resources, the plan is to address some of the major issues the IRS has faced in the past. One such issue is that certain departments within the Internal Revenue Service are still operating on computer systems from the 1960s.
A part of the bill that business owners will want to pay attention to is the extension of the limitation on net business losses for individuals. The last-minute change in the law extends the IRS section 461(I), which limits an individual business or person’s ability to use net operating losses. This limitation was originally supposed to end in 2026, but with the new addition, the limitation will now apply through 2028.
The Inflation Reduction Act also contains a modification on payroll and tax R&D credit. The new law will continue to permit small businesses that may not have enough income tax liability to take advantage of their research and development credit to apply for up to $250,000 of the credit to put towards their social security payroll tax liability. The new law would permit an additional credit of up to $250,000 against the Medicare payroll tax for tax years beginning after December 31, 2022. For those involved with research and development, The R&D tax credit is targeted toward taxpayers that somehow improve products, processes, techniques, formulas, or software. Each individual’s credit is calculated based on increased research activities and the resulting expenditures. This credit will also reward companies that pursue Innovations with increasing investment. To qualify, the small business must have less than $5 million in gross receipts and be less than five years old.
The final part of the bill that has a great chance of impacting our clients in one shape or another is the climate change tax incentives that will be put in place. The bill includes modifications to current credits and creates new tax credits to address climate change. These include but are not limited to credits for purchasing new and used electric vehicles.
The following are the most notable items previously discussed in the Build Back Better Act that are missing from the Inflation Reduction Act of 2022. No changes to the estate and gift tax rules, rates on high earners, and no increase in corporate income tax rates, which will remain at 21% (except for large corporations with more than $1 billion in book profits). There are also no changes to the qualified small business stock exclusion or the like-kind exchange rules. Once the Inflation Reduction Act is signed by President Biden (expected today, 8/16/2022), The IRS and the Treasury will need to guide many of these changes, particularly concerning tax credits. We will continue to monitor any clarifications issued and update you on what they could mean for you.
Navigating the complex business world and its interactions with the government in general and the IRS can be daunting. Here at Interactive Accountants, assisting businesses to grow and succeed regardless of our financial environment is one of our number one goals. We are here to help because the better you do, the better we all do! If you’re still not convinced yet to give us a call, feel free to look at our other blogs regarding the help we offer various businesses and offices. Beyond the information we have presented in this article, we also focus on accounting for law firms, accounting for medical professionals, accounting for eCommerce, and accounting for amazon DSPs. If you are a professional in any field that these tips apply to or are simply curious about a topic in this article, please schedule a free consultation here with our owner Matthew Shiebler, CPA. He’s been practicing accounting for over 25 years and is a business owner, just like you!