The Inflation Reduction Act (IRA) was passed by the U.S. senate and signed into law this month. When this happens, there will be some notable tax changes. Here is a summary of the ones with the most significance for freelance business owners:
1. Enhanced IRS enforcement could increase your risk of an audit.
The IRA has big time funding for the IRS to the tune of a $3.1 billion to increase for IRS taxpayer services, $45.7 billion for IRS enforcement, $25 billion for IRS operations support and $4.7 billion for IRS technology upgrades. This means the IRS is going to have more resources than they have in almost thirty years directed at ensuring no taxpayer is left behind (or able to hide) at least for very long.
Not only could the full court IRS press mean more audits of small businesses, expedited action for late or non-payment of taxes with fines and penalties, it is likely also to mean that the IRS will be able to monitor online app sales, cryptocurrency transactions, and other less regulated business transactions with enhanced technology expressly for this purpose.
The bottom line is that as a freelancer with a business, you definitely need to be upfront in reporting all income as well as be meticulous in your record keeping.
2. More tax credits for energy-efficient purchases including new and used electric cars.
The new law, when enacted, has a far-reaching and expansive list of tax credits to support energy-efficiency and climate preservation measures such as:
- Increasing the $500 lifetime tax credit limit for qualifying energy-efficient improvements to a $1,200 annual tax credit.
- Removal of the manufacturing limit on qualifying electric vehicles, (currently impacting General Motors, Tesla, Lexus, and Toyota electric vehicles) for the credit under current law.
- Limits on claims of the electric vehicle credit to Adjusted Gross Income (AGI) limits of $300,000 for married, $225,000 for head of household and $150,000 for single filers.
- An electric vehicle credit for used electric vehicles of 30% or $4,000, whichever is lower, with AGI limits of $150,000 for married, $112,500 for head of household and $75,000 for single filers.
If you’ve been thinking about making upgrades to your home for energy efficiency or purchasing an electric vehicle, then now may be the time to do it based on the tax incentives included in the IRA. However, there are a few finer points to be aware of on the qualifications for the electric vehicle tax credits:
- There is a requirement that, to qualify for the credit, an electric vehicle must contain a battery built in North America with minerals mined or recycled on the continent.
- For the full credit of $7,500, 40% of the metals used in a vehicle’s battery must come from North America. By 2027, this required threshold increases to 80%. If the metals requirement isn’t met, buyers are eligible for half the tax credit or $3,750.
- The bill also requires that after 2024 no vehicles would be eligible for the tax credit if its battery components come from China. This is to incentivize production in the United States.
3. Health insurance subsidies under the ACA are extended.
The Act includes an extension of the temporarily expanded health insurance subsidies, originally instituted as part of the American CARES Act (ACA) as tax credits, that were put in place for 2021 and 2022 as part of Covid relief. There are more generous subsidies in the Act which remain available through the end of 2025.
If you are self-employed and are getting your health insurance through the government health insurance exchanges with subsidies, then you should be able to avoid any significant premium increase, all else being equal in terms of your coverage, etc.
4. An increase in R&D tax credits against Medicare taxes.
As you may be aware, businesses can claim research and development tax credits against income tax that is based on their qualified research expenses of up to $250,000.
The IRA would allow a small business, defined as a business with less than $5 million in gross receipts and that is under five years old, to apply for up to another $250,000 of the research credit toward its Medicare Hospital Insurance tax for taxable years beginning after December 31, 2022. The credit cannot exceed the tax imposed for any calendar quarter, with unused amounts of the credit carried forward.
The total available R & D tax credit is $500,000 if a business qualifies with their activities. Under the previous R&D credit, businesses had the option to apply their tax against the Social Security portion of payroll taxes and this new credit provision has been expanded it to include the Medicare portion of payroll taxes.
Stay tuned for more updates on the Inflation Reduction Act and any changes enacted before it is signed into law. The majority of these changes are anticipated to be effective for the tax year starting January 1, 2023.