- Learn about the payroll tax credit for research.
- Find information about the extension of the limit on excess business losses of noncorporate taxpayers.
The Inflation Reduction Act was signed into law by President Biden on August 16. It contains many provisions related to climate, energy, and taxes. There has also been a lot of media coverage about the law’s impact on large corporations. For example, the Inflation Reduction Act contains a new 15% alternative minimum tax on large, profitable corporations. The law also adds a 1% excise tax on stock buybacks of more than $1 million by publicly traded U.S. corporations.
But there are also provisions that provide tax relief for small businesses. Fiducial offers two of these provisions below.
The Inflation Reduction Act offers a payroll tax credit for research
Under current law, qualified small businesses can elect to claim a portion of their research credit as a tax credit against their payroll tax liability, rather than against their income tax liability. This became effective for tax years that begin after December 31, 2015.
Qualified small businesses that elect to claim the research credit as a payroll tax credit do so on IRS Form 8974, “Qualified Small Business Payroll Tax Credit for Increasing Research Activities.” Currently, a qualified small business can claim up to $250,000 of its credit for increasing research activities as a non-refundable tax credit against the employer's share of payroll tax.
The Inflation Reduction Act makes changes to the credit, beginning next year. It allows for qualified small businesses to apply an additional $250,000 in qualifying research expenses as a tax credit against the employer's share of payroll taxes. The credit can’t exceed the tax imposed for any calendar quarter, with unused amounts of the credit carried forward. This provision will take effect for tax years beginning after December 31, 2022.
A qualified small business must meet certain requirements, including having gross receipts under a certain amount.
Extension of the limit on excess business losses of noncorporate taxpayers
Another provision in the new law extends the limit on excess business losses for noncorporate taxpayers. Under prior law, there was a cap set on business loss deductions by noncorporate taxpayers. For 2018 through 2025, the TCJA limited deductions for net business losses from sole proprietorships, partnerships, and S corporations to $250,000 ($500,000 for joint filers). Losses in excess of those amounts (which are adjusted annually for inflation) may be carried forward to future tax years under the net operating loss rules.
Although another law (the CARES Act) suspended the limit for the 2018, 2019, and 2020 tax years, it’s now back in force and has been extended through 2028 by the Inflation Reduction Act. Businesses with significant losses should consult with Fiducial to discuss the impact of this change on their tax planning strategies.
We can help
These are only two of the many provisions in the Inflation Reduction Act. There may be other tax benefits to your small business if you’re buying electric vehicles or green energy products. Have questions about the new law and your situation? Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations to discuss your situation.