Legislation

Three items in the Inflation Reduction Act that will hurt small businesses

Here comes the Inflation Reduction Act, and none of my small business clients, Republican or Democrat, would argue with sound government action that aims to protect our environment. Neither would I. In fact, I’m in support of some of the bill’s provisions, particularly those helping us address climate issues. It’s the right thing to do to reduce the long-term consumption of fossil fuels.

To that end, tax credits for purchasing electric vehicles and for consumers and businesses to add renewable energy items like solar panels and electric HVAC and water heaters is a step in the right direction. And there will certainly be opportunities for entrepreneurs in the clean energy sector, now that the government will be funding billions in clean energy manufacturing, including the production of solar panels, wind turbines, batteries and critical minerals processing. 

It’s good stuff, but it has to be paid for. So who will be paying? It’s not going to be just “the wealthy.” It will be small businesses as well. The Inflation Reduction Act will actually increase inflation — or at least raise the costs and reduce revenues — for many of us and in three big ways.

The bill authorizes the government to step up negotiations with pharmaceutical firms to lower prices on medicines and even put a cap on what seniors on Medicare would pay for drugs each year at $2,000. It also adds inflation protection to drug prices, requiring pharmaceutical companies to rebate the government if they raise prices. This is good for seniors on Medicare since it will limit their costs. But there are still costs, including billions in research and development outlays that help companies create products that save millions of lives, and someone’s going to have to make up the difference.

Who? That would be everyone else paying for these products on their private health insurance plans. 

These would be workers and businesses who share in their employees’ monthly health care premiums. I predict these premiums will likely rise to make up for the difference, which means businesses — big and small — need to be budgeting for higher costs. 

The bill also includes more than $80 billion in funding for the IRS. Part of that funding will be earmarked for hiring tens of thousands of auditors and increasing the number of audits of companies. Many tax experts believe that these efforts will be directed mainly at the nation’s small businesses. 

“The IRS will have to target small and medium businesses because they won’t fight back,” Joe Hinchman, executive vice president at National Taxpayers Union Foundation, told the New York Post. “We’ve seen this play out before … the IRS says, ‘We’re going after the rich’ but when you’re trying to raise that much money, the rich can only get you so far.”

According to the nonpartisan Joint Committee on Taxation, approximately 78 to 90% of the estimated additional $200 billion the IRS will collect will come from small businesses making less than $200,000 annually. That’s because only 4 to 9% of the additional revenues would come from businesses making more than $500,000 annually, with the rest being made up by small businesses earning less.

Just responding to a single notice from the IRS, let alone engaging in a full-blown audit — is an administrative burden for most small businesses. So activity from the agency will only add additional costs for many in the next few years. 

Finally, the Inflation Reduction Act raises costs for many corporations. The legislation imposes a new corporate minimum tax on companies making more than $1 billion a year and places an excise tax on stock buybacks. When people hear this, they say, “Oh, that only applies to the biggest corporations and they can afford this,” or “hey, that’s a tax on the rich so who cares?”

Actually, small businesses care.

That’s because small businesses are usually the largest benefactors of big business spending. My firm counts our largest corporate clients as our most profitable clients. Small firms sell technologies, products, parts and materials to large companies and provide services ranging from landscaping and deliveries to marketing and accounting. 

And it’s not just the big corporations that benefit smaller firms. It’s also the employees that work at these big corporations. Who else is spending their disposable income at pizza restaurants, nail salons and jewelry stores? Who is going to fitness training, hiring contractors and getting their cars serviced at small businesses in their neighborhoods?

When big companies get taxed, big companies have less money to spend. This means they have fewer resources to invest and pay for the products and services that small businesses provide. It also means that they are faced with limiting the hiring and compensation of people that provide to their local merchants, service providers and restaurateurs. Losing revenues in an already slow economy is not a good thing for small businesses.

The Inflation Reduction Act is not reducing inflation for small businesses. It’s actually increasing expenses and hurting demand. Legislation that aims at protecting our environment is good, but there are costs. 

Why aren’t these costs funded by cutting other wasteful areas of government instead of tax increases? 

That’s a question that most of my small business clients are asking. Unfortunately, that’s never been a consideration by our current political leaders — or any government bureaucrat. So instead the money will have to come from somewhere. And we all know from where.

• Gene Marks is a CPA and owner of The Marks Group, a technology and financial management consulting firm specializing in small- and medium-sized companies.


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