New and Noteworthy for Businesses

TAX RATES AND BUSINESS STRUCTURES

The biggest news affecting businesses in the Inflation Reduction Act is that large businesses with more than $1 billion in reported income will pay taxes at a minimum corporate rate of 15% effective January 1, 2023.

For other C corporations, the tax rate remains a flat 21%. There is also favorable treatment for pass-through companies, including S corporations and limited liability companies (LLCs).

The new law provides a handful of new tax breaks for small businesses:

RESEARCH CREDIT DOUBLES

Small businesses will see the refundable research and development tax credit double to $500,000. Starting in 2023, they may use the credit to further reduce payroll taxes and several other business expenses by up to $500,000 annually.

ACA TAX CREDIT EXPANDED

The premium tax credit that supports Affordable Care Act (ACA) plans was extended through 2025. The ACA Marketplace serves as an important source of coverage for 2.6 million small business owners and self-employed adults. Small business owners and self-employed people make up 25% of ACA Marketplace enrollment among working-age adults.

Different business structures not only receive different tax rates, but deductions and credits, too. Not all business types may qualify for some business tax breaks, so consult your tax professional to learn more.

AVOIDING DOUBLE TAXATION

Corporate business owners are still double taxed—paying corporate taxes and personal taxes. But they can avoid this double taxation by organizing their businesses as pass-through-entities, such as S corporations or limited liability companies (LLCs). There is no federal corporate income tax on business income for these entities. Instead, profits flow through to the individual tax returns of owners, paying income tax once at the individual tax rate.

Sole proprietorships and partnerships also avoid double taxation and receive flow-through treatment. But these latter two business structures do not provide limited liability. Sole proprietors and partners may be personally liable for claims against their businesses.

PASS-THROUGH INCOME

Owners of some pass-through businesses can now take a deduction of up to 20% of qualified business income—plus 20% of qualified real estate investment trust (REIT) dividends and qualified publicly-traded partnership (PTP) income. This tax break phases out for single taxpayers at $170,050 of taxable income, and for married taxpayers at $340,100—not including the qualified business income deduction. Above these thresholds, the deduction is based on whether you are a specified service trade business (SSTB) or not. There is a caveat: The pass-through provision will expire in 2026 unless Congress votes to make it permanent.

NET OPERATING LOSSES

Net operating losses for corporations can be carried forward indefinitely. The previous ability to carry back losses and apply them to years when a company had taxable income was eliminated in 2017 under the Tax Cuts and Jobs Act (TCJA).

SMALL BUSINESS TAX ENERGY CREDITS

The Inflation Reduction Act also includes new provisions that will help small businesses reduce energy costs. Small businesses can receive a tax credit that covers 30% of the cost of switching to solar power, 30% of purchase costs for clean commercial vehicles, including electric and fuel cell models, and a $5 per square foot tax credit for energy efficiency improvements.