In August 2022, the Inflation Reduction Act (IRA) was passed into law.
The Inflation Reduction Act will provide incentives and tax credits that will be beneficial to households and small businesses alike, but specifically service-based businesses may be affected significantly. Your accountant can advise you on how this new act will impact your taxes, as well as how to take advantage of the Inflation Reduction Act tax credits. This article will expound further on the latter.
Energy Efficiency Credits
If your service-based business involves transportation, like vans and trucks, you should strongly consider transitioning to an energy efficient vehicle. The IRA extends a tax credit that covers 30% of the purchase costs for clean commercial vehicles, such as electric and fuel cell models, through December 31st, 2032.
Additionally, there is a tax credit that covers 30% of the cost of installing solar powered systems, like solar panels for electricity, up to $1,200 each year per taxpayer.
Finally, one of the best clean energy tax credits in the IRA – small business owners who own buildings can receive $5 per square foot to install energy efficient improvements that will allow decreased utility bills for small business building owners. Check in with your accountant to see if you qualify.
Health Care Cost Updates
Owning a service-based business can involve many high costs, including healthcare for you and your employees. The Inflation Reduction Act will assist with these healthcare costs by preserving the premium tax credits offered through the American Rescue Plan and extending them through to the year 2025.
Studies show that at least one-quarter of the individuals who use the Affordable Care Act (ACA) Marketplace are self-employed and small business owners. This will be quite beneficial as you can now be eligible to save well over $500 annually on your health insurance premiums.
An inclusion of the Inflation Reduction Act concerning healthcare, is the extension of the American Rescue Plan Act, which will allow individuals and small businesses to apply for the Health Care Premium Tax Credit. The qualification for this tax credit is having an income of over 400 percent of the Federal Poverty Level.
The American Rescue Plan will now broaden the reach of the premium tax credits to all users of the Marketplace whose incomes exceed 8 percent of their, under the Inflation Reduction Act. This will significantly impact small business owners and self-employed individuals who do not have access to employer-sponsored healthcare coverage.
Update to R&D Credits
The IRA has increased the research and development tax credit, which is refundable, from $250,000 to $500,000, doubling the amount given to small businesses. Your business doesn’t have to engage in significant scientific research to use this perk, despite the name of the tax credit. The small businesses that benefit from this tax credit are free to utilize it to reduce business expenses, including but not limited to, payroll taxes, improving products and services, and developing intellectual property.
The Inflation Reduction Act will provide a tax credit for clean energy manufacturing projects which are created in energy neighborhoods where power plants and coal mines have closed. There are bonus credits for projects that develop well-paid jobs.
The White House released a state-by-state fact sheet for the Inflation Reduction Act, which can be found online here. Be sure to check for which tax credits are available in your state for your service-based business.
The bill will create some tax saving opportunities for small businesses, and your accountant can assist in determining how it will have a positive impact on your taxes. To learn more about how proactive tax planning with IRA tax credits can affect your small business, click the link below to set up a consultation with us.