On August 16, President Biden signed the Inflation Reduction Act (IRA), which includes numerous provisions pertaining to taxes, energy and the environment. The effect of the law on big businesses has received a lot of media attention. For instance, the IRA imposes a new 15% alternative minimum tax on large, profitable corporations. The law also adds a 1% excise tax to stock repurchases by publicly traded U.S. corporations that total more than $1 million. There are some provisions in the IRA that give small businesses tax relief, including a payroll tax credit and an extension of business losses in certain circumstances.
A payroll tax credit for research
Under current law, qualified small businesses can choose to claim part of their research credit against their employer Social Security tax liability as a payroll tax credit. This was effective for tax years beginning after December 31, 2015.
In order to claim the research credit as a payroll tax credit, qualified small businesses must complete IRS Form 8974, “Qualified Small Business Payroll Tax Credit for Increasing Research Activities.” The employer’s portion of Social Security tax can currently be offset by up to $250,000 of a qualified small business’s payroll tax credit for expanding research activities.
Beginning next year, the IRA will change the credit. It permits qualified small businesses to utilize up to $250,000 in additional qualifying research expenses as a payroll tax credit against the employer portion of Medicare. The credit cannot be greater than the tax due for any given calendar quarter, and unused credit balances carry forward. This provision is effective for tax years starting after December 31, 2022.
One of the prerequisites for being considered a qualified small business is having gross receipts below a specific threshold.
Some excess business losses extended
The IRA also increases the limit on excess business losses for noncorporate taxpayers; the amount that noncorporate taxpayers could deduct for business losses was previously capped. The Tax Cuts and Jobs Act limited the amount that sole proprietorships, partnerships, and S corporations could deduct for net business losses from 2018 through 2025 to $250,000 ($500,000 for joint filers). The net operating loss rules allow losses above those caps—which are adjusted yearly for inflation—to be carried forward to future tax years.
The CARES Act suspended the restriction for the tax years of 2018, 2019, and 2020, but it has since been reinstated and extended by the IRA through 2028. Businesses with sizable losses should talk to us about how this move will affect their tax planning strategies.
We can assist
These two provisions are just a few of the many in the IRA. If your small business purchases electric vehicles or green energy products, there may be additional tax advantages. If you have inquiries concerning the new law or how it applies to you, contact us.