January 2023
Even though the new laws are intended to target corporations and the wealthiest taxpayers (with annual earnings over $400k for individuals and over $450k for married couples), all individuals and small businesses will feel the effects of the new changes. These changes will positively affect individuals who are prescribed certain drugs under Medicare Part D. The tax plan tackles climate change with green energy tax credits that focus on reducing electric power, transportation, and commercial and residential emissions. Additionally, there are increased taxes and fees on the fossil fuel sector. While the new tax plan is designed to provide price stability and create time for the government to develop other solutions, it will not be a home run for the economy.
Specifically for business owners, there are going to be some hard decisions to make going forward. If we take a step back, the Federal Reserve has two mandates for their part in stabilizing the economy. One, they are expected to maintain price levels, which is currently not happening with inflation rates at 8.3% as of August 2022. Secondly, their goal is to maintain unemployment at a reasonable level, typically between 3–5%. Business owners are significantly affected by both sections of the Fed’s mandate. Depending on the size of the business and its tax structure, business owners may benefit from some reduced tax liability while larger corporations will pick up the tax bill and, as a result, cut their overhead, like salaried workers. One trade-off that small businesses will experience is are search and development tax credit of up to $250,000 that can be claimed against payroll taxes. As discussed, the tax bill will be felt most among corporations with profits over $1 billion.
Alternative minimum tax (AMT) is an idea that people may be familiar with as affecting individuals. However, the AMT on corporations could have a significant impact on creating economic inefficiency, increasing tax burdens, and declining tax revenues over time (as seen for 30 years before the Omnibus Budget Reconciliation Act of 1993 significantly reformed AMT). Many business owners may find themselves being impacted by their business having higher costs from suppliers or manufacturers as well as being taxed more under certain provisions of the new tax plan. As a result, they will be incentivized to take on costs for the business that are not related to hiring and, in fact, will result in low wage earnings taking more of a hit in the way of lost employment. A small provision of the new tax plan extends the limitation on pass-through business losses enacted in the 2017 Tax Cuts and Jobs Act for two years through 2028. For taxpayers who were expecting to benefit from those losses offsetting income, they are going to see a smaller take-home amount from their business.
The Biden administration proudly announced a small business boom under its tenure during 2021 but the flipside of that claim is that many individuals were let go from their jobs in 2020 and forced to find new means of income. Certainly, there is a lot that can be done to expand capital to these business owners and make investments in helping small businesses to navigate available resources. Ultimately, though, the result of the new tax bill and any federal spending to support small businesses needs to make its way to the most underserved communities so that when inflation hits again, these communities will feel some sense of control.
By Bryce Snell, Wealth Advisor
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Sources:
https://taxfoundation.org/inflation-reduction-act/
https://taxfoundation.org/inflation-usiness-act-green-energy-tax-credits/
https://taxfoundation.org/prescription-drug-pricing-reform/
https://taxfoundation.org/book-minimum-tax-analysis/
https://taxfoundation.org/corporate-alternative-minimum-tax/
https://www.whitehouse.gov/briefing-room/statements-releases/2022/04/28/fact-sheet-the-small-business-boom-under-the-biden-harris-administration/
Disclosures:
This information is presented for discussion and illustrative purposes only. The views and opinions expressed by the original authors are as of the date of its posting and are subject to change. These views are not intended to constitute investment or tax advice and information contained herein may not be relied on for purposes of avoiding any federal tax penalties under the Internal Revenue Code. You should seek tax advice from your financial and tax professionals before implementing any transactions and/or strategies concerning your finances.
Although the information contained in this report is from sources deemed to be reliable, Morton Wealth makes no representation as to the adequacy, accuracy or completeness of such information and it has accepted the information without further verification. No warranty is given as to the accuracy or completeness of such information.
