Summary for Small Businesses: The Inflation Reduction Act of 2022

Introduced in the House back in September of 2021, the Inflation Reduction Act of 2022 was signed into law in August of 2022 and officially became Public Law No: 117-169. While the Inflation Reduction Act contains several new environment-related tax credits along with preexisting credits that are of interest to both individuals and small businesses. We’re going to focus on clearly identifying the credits now available to small businesses thanks to this new Act.

As always, before making major changes to your business, please consult with your tax advisor and bookkeeper/accountant to ensure that you’ve clearly understood what is required to claim these credits. If you do not currently have a professional on hand, please reach out to schedule a consultation with ModVentures.

Increase in Qualified Small Business Payroll Tax Credit for R&D

Adding onto the current R&D Tax Credit for small businesses that have been in place since the tax year beginning after December 31, 2015, the Inflation Reduction Act of 2022 expands upon the $250,000 credit for increasing research activities as a payroll tax credit against the employer’s share of Social Security tax. 

This expansion tackles the concern that some small businesses may not have a large enough income tax liability to take advantage of the research credit. Now, for tax years beginning after December 31. 2022, Qualified Small Businesses (QSBs) may apply an additional $250,00 in qualifying research expenses as a payroll tax credit against the employer’s share of Medicare. The credit cannot exceed the tax imposed for any calendar quarter, with unused amounts of the credit carried forward.

Credit for Qualified Commerical Clean Vehicles

Introduced in the Act is a new credit for qualified commercial clean vehicles that are acquired and placed in service after December 31, 2022. The credit per vehicle is lesser of:

1. 15% of the vehicle’s basis, 30% for vehicles not powered by a gasoline or diesel engine
2. The “incremental cost” of the vehicle over the cost of a comparable vehicle powered solely by a gasoline or diesel engine. 

The maximum credit per vehicle is $7,500 for vehicles with gross vehicle weight ratings of less than 14,000 pounds, or $40,000 for heavier vehicles. This credit is set to expire in December of 2032. For more information on Clean Vehicle Tax Credits in the Inflation Reduction Act of 2022, please consult the official documentation here.

Extension of Incentives for Biodiesel, Renewable Diesel, and Alternative Fuels

Included in a pre-Act law, you could claim a credit for sales and use of biodiesel and renewable diesel that you use in your trade or business or sold at retail and placed in the fuel tank of the buyer for such use and sales on or before December 31, 2022. Now you are permitted to claim a credit for sales and use of biodiesel and renewable diesel fuel, biodiesel fuel mixtures, alternative fuel, and alternative fuel mixtures on or before December 31, 2024.

You are now also allowed to claim a refund of excise tax for use of:

1. Biodiesel fuel mixtures for a purpose other than for which they were sold or for resale of such mixtures on or before December 31, 2024
2. Alternative fuel as that used in a motor vehicle or motorboat or as aviation fuel, for a purpose other than for which they were sold or for the resale of such alternative field mixtures on or before December 31, 2024.

Other Benefits of the Inflation Reduction Act of 2022 for Small Businesses

There are other benefits that are covered under the Inflation Reduction Act of 2022 that may apply to your small business. The best way to determine if they apply or affect your business is to read through the Act yourself or to consult with your tax preparer or tax advisor.

If you do not have a tax consultant or preparer readily available, please contact the ModVentures team to be connected with our tax professionals that are up to date on all aspects of this bill, and others, that can benefit your business this tax year.