5 Ways to Capitalize on the Inflation Reduction Act
The Inflation Reduction Act of 2022 is a sweeping federal law aimed at increasing climate measures, enhancing domestic energy production and reducing the federal deficit, among other measures. For small businesses and startups looking for ways to capitalize on the Inflation Reduction Act, there are a host of new or expanded tax credits available.
Learn more about the impact of inflation, as well as how the Inflation Reduction Act in Louisiana can help entrepreneurs and small businesses save money and fund important investments.
What the Inflation Reduction Act Intends to Do
As the name implies, the Inflation Reduction Act seeks to curb inflation and its adverse effects on consumers, businesses and the overall economy. The law’s many provisions, programs and tax credits are designed to reduce the federal deficit, address climate change and reduce “prescription drug costs, health care costs, and energy costs,” according to the White House.
The law is weighted toward investments in clean energy ($393.7 billion), with more than half of that in the form of corporate tax credits.
How Does Inflation Affect Small Businesses?
Inflation reflects increasing prices for goods and services, which affects startups and small businesses in multiple ways — among them, higher supply chain costs for raw materials, lower profit margins and higher fixed costs, such as for rent or utilities. Inflation in electricity and fuel prices, for example, can affect operating expenses at companies with large physical footprints or that transport goods. By increasing business costs, inflation can also reduce investment in the business, including hiring and equipment upgrades.
Inflation can also impact consumer spending patterns. When business costs rise, they’ll typically respond by raising prices themselves. This squeezes consumers, especially if wages aren’t increasing in kind. They may cut back on discretionary spending, which can harm small businesses.
5 Ways to Capitalize on the Inflation Reduction Act
Under the Inflation Reduction Act, small businesses and startups can access numerous tax credits and other benefits. Here are five areas where tax incentives could benefit your business.
Research and Development Credits
Businesses can already claim tax credits for increasing their research and development (R&D) activities. For small businesses, the Inflation Reduction Act doubles the maximum payroll tax credit — from $250,000 to $500,000 — starting with the 2023 tax year. Companies can use this credit to reduce the employer’s share of specific tax liabilities and focus on innovation and experimentation.
The law lets qualifying small businesses allocate “a portion of the payroll tax credit to apply against the employer’s portion of Medicare tax,” not just Social Security taxes. This means that startups and small businesses can further reduce their payroll tax liability, providing additional financial flexibility.
R&D is a powerful tool for businesses looking to grow from startup to scale-up. This expanded tax credit incentivizes businesses to invest in research by providing a near-term tax benefit regardless of whether the research pays off.
Energy-Related Tax Credits
Louisiana is well-positioned to benefit from the energy-related provisions of the Inflation Reduction Act, given its leading status in energy and chemical production. The law extends and expands the investment tax credit and production tax credit for clean energy projects, including hydroelectric, geothermal, solar and wind. It also creates a manufacturing tax credit for equipment produced domestically, including solar panels and wind turbines.
Louisiana has a goal of achieving net-zero emissions by 2050, and the Inflation Reduction Act could further support startups and small businesses looking to capitalize on the energy transition. For example, the IRA expanded benefits for energy-efficient commercial building design. While there’s a lower base deduction amount of $0.50 per square foot (compared to $1.88 in 2022), businesses can now earn deductions of up to $5.00 per square foot by meeting energy efficiency, prevailing wage and apprenticeship requirements.
Commercial Vehicle Tax Credits
Small businesses that use commercial vehicles might be eligible for tax credits of up to $40,000 for clean energy commercial vehicles under the Inflation Reduction Act. To qualify, vehicles need to be subject to a depreciation allowance, can’t be leased and must meet additional IRS requirements. There’s no limit to the number of credits per business.
Benefits are also available for entrepreneurs and small-business owners who purchase used plug-in electric vehicles or fuel cell vehicles. The credit can’t exceed owed taxes or be carried over to future years, and it’s subject to income limits, among other IRS requirements.
Renewable Energy Tax Credits
Startups and small businesses can reduce their scope 2 emissions and energy procurement costs by using renewable energy sources such as wind and solar.
The Inflation Reduction Act introduced two key provisions for renewable energy tax credits: the Renewable Energy Production Tax Credit (PTC) and the Business Energy Investment Tax Credit (ITC). The PTC is more applicable for utility-scale power generation than small businesses and startups.
However, the ITC could be valuable for small businesses or startups with on-site power generation. This tax credit covers up to 30% of the upfront cost of qualifying energy properties, including fuel cells, solar, wind and standalone battery storage. Solar panels, for example, could qualify for this credit.
Health Care Marketplaces
The Inflation Reduction Act affects small-business health coverage by extending premium tax credit support for Affordable Care Act (ACA) plans through 2025. This extension is designed to provide ACA marketplace access to health coverage for startups, small-business owners and self-employed individuals. The White House projects that the law will help millions of people save, on average, $800 per year in health insurance premiums.
Make Sure Your Business Understands This Law
There are numerous ways to capitalize on the Inflation Reduction Act, including reducing costs, subsidizing investments and getting support for clean energy improvements. The Inflation Reduction Act can be especially helpful for small businesses and startups focused on energy and manufacturing, as well as those looking to focus on energy efficiency and green energy in their existing facilities.
Along with the benefits provided by the law, there are many opportunities for startups to leverage Louisiana small-business services, such as Nexus Louisiana.
NexusLA provides a collaborative ecosystem that brings together startups, investors and industry experts to provide the coaching, capital and connections that accelerate your growth. Learn more about our programs.