Inflation Reduction Act (IRA) Of 2022 – Impact on Your Manufacturing Business
On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 (IRA) which includes widespread provisions impacting taxation, healthcare and renewable energy. Although many of these provisions will not have a direct impact on small to midsized manufacturing businesses, the indirect impact will be consequential for years to come.
Arguably, one of the most significant provisions is the imposition of the Alternative Minimum Tax (AMT) on corporations with profits over $1 billion. The new AMT imposes a tax rate of 15 percent on the financial statement income of large corporations. Although this likely would not directly impact your manufacturing business, it certainly will have an indirect impact on it, as well as the economy. Before the IRA, the tax code was written to incentivize investment through tools such as accelerated depreciation. As financial statement income does not incorporate accelerated depreciation, this alone would deter investment by large corporations, which will impact the economy. The Joint Committee on Taxation (JCT) estimates that approximately 150 corporations would be subject to the new tax each year and that just under half of the tax revenues would come from the manufacturing sector. In other words, large manufacturers will be hit hard by this new tax and will likely raise prices to counteract the tax expense. Although some of these large manufacturers may be your competitors, they might also be suppliers, even if indirectly, so there is reason to believe prices may rise.
Despite the name of the act, the Congressional Budget Office (CBO) estimates it will have a negligible impact on inflation during 2022 and may even rise by 0.1 percent in 2023. Although the IRA is intended to not raise taxes on small businesses or taxpayers earning less than $400,000 per year, the indirect cost of rising prices by large corporations will certainly impact the pockets of the working class. As previously noted, large corporations will now have an added tax expense on their income statement that they will pass on to consumers. Only time will tell what impact this will have on small businesses, but we should be wary of the statement that they will not be impacted.
In addition to subsidizing renewable energy projects, one large expenditure of the IRA is to provide the Internal Revenue Service (IRS) with approximately $80 billion in funding over 10 years to improve its tax enforcement. It’s time, more than ever, to review your tax compliance and ensure you maintain substantiative records to validate your income and expenses. More IRS funding will result in more tax audits, so it is imperative to ensure your business and personal tax compliance is current and accurate.
There are some tax provisions of the IRA that should be analyzed for their potential benefit to your business and personal tax expense. One provision of the IRA that provides direct relief for small businesses is the increase in the “qualified small business” (QSB) payroll tax credit for increasing research activities. The credit for increasing research activities is available for certain businesses involved in “research activities.” The tax code gives a loose definition for research activities and can include items such as remanufacturing furniture, so it does not necessarily have to include scientists with beakers in lab coats. Under the IRA, effective for tax years beginning after 2022, businesses may now apply an additional $250,000 as a credit toward the employer’s share of Medicare. Under the old law, the payroll tax credit could only be used to offset the employer’s share of Social Security tax. A QSB is one with receipts of less than $5 million that started generating revenue less than six years prior to the current tax year. In other words, if you have a relatively new, small business involved in one of the loosely defined research activities, it may benefit you to elect to claim this increased credit to offset your payroll tax liability.
Our professionals at Dannible & McKee, LLP are highly knowledgeable on the provisions of the IRA and can work with you to analyze the potential tax savings for your manufacturing business and show you how they can be optimized. Contact us today.
Contributing author: Anthony J. Cerchia, CPA is a tax manager at Dannible & McKee, LLP. Anthony has over five years of experience providing tax planning and ownership transition analysis to a wide range of clients, specifically within the manufacturing, automotive, construction, architecture and healthcare industries. For more information on this topic, you may contact Anthony at email@example.com or (315) 472-9127.