The Inflation Reduction Act was approved by the U.S. Senate on Aug. 7. Among many provisions, it would change tax policy. What impact do you expect with these changes if the bill passes the House?
There are about 24 new tax credits and incentives for clean energy, clean fuels and admissions reductions that business owners and individuals should be able to take advantage of. But the biggest headline is a 15% minimum tax based on book income for businesses that make more than $1 billion. The interesting thing of note is that the 15% minimum tax is based on a book income number. When we report our income tax return, it’s on rules set by the IRS. Generally, for businesses in the billion-dollar range, their financial statements are going to be based on generally accepted accounting principles. GAAP is set up for investors to make reasonable decisions based on a baseline understanding of the accounting principles. We’re in a situation where we might make a tax decision based on a set of financial statements that are not meant for tax analysis. Normally, our book-purpose financial statements are to show the economic realities of the business and make them comparable between industry and between company. That’s why we have a set of books and then a separate code for income tax returns. But when we blend those, we have dual purpose financial statements, which has a number of issues. It could become very tricky, and it could become an area where larger businesses are incentivized to manipulate financial statements more for tax advantages. This does attempt to close a loophole. We’ll see in the practical application of it if it actually does.
The bill also would fund more auditing from the IRS. What’s that potential impact?
In June, the IRS reported they had about 11 million returns that they had not touched in their backlog. Not too long after that, the Taxpayer Advocate, which is an independent wing of the IRS, said that number was closer to 21 million. The apportioned funds are $80 billion that goes to the IRS. It is earmarked in the bill for enforcement, so increased auditing. We hope that inside of that they also can use that money to add additional resources to help cut down that backlog because that backlog has really caused individuals, businesses, CPAs, you name it, trouble through this summer. Call times to the IRS are at an incredible high. Very often we cannot get through to an agent in a day. We will call at 7 a.m. and might not get through till the end of the day. Literally on hold. We’ve gotten to the point where we’ve gotten lien notifications, we’ve gotten massive penalties for returns that have been filed and are waiting to be processed. The Missouri Department of Revenue actually was so far behind cashing payment checks from the April 15 deadline that we had outstanding checks until June.
What’s the latest on the federal Employee Retention Credit, and what can businesses stand to gain by participating?
The Employee Retention Credit is a refundable credit on payroll tax returns. It was originally created by the CARES Act. One benefit of the ERC credit versus (Paycheck Protection Program) is that it’s generally funded by the Social Security Trust. So, there’s not a limited amount of funds that were allocated. Because it’s a refundable tax credit, that refund is taken directly on quarterly payroll tax filings and businesses don’t need a bank as an intermediary. The credit is available for quarters two through four of 2020, and the first through the third quarter of 2021. Generally, businesses that experienced a reduction in income during those periods compared to the same quarters in 2019 qualify. But the really powerful piece of the ERC credit is there are provisions for qualification centered around complete and partial suspensions of business operations. We find that supply chain interruptions very likely can create a qualifying event in a partial shutdown, which allows us to qualify for these credits.
The economy just recorded two quarters of decreases in the gross domestic product. What tax considerations should businesses keep in mind during this time as they prepare for the possibility of continued economic downturn?
We should never make business decisions solely based on tax implications. Now, more than any other time, what business owners and accountants need to pay attention to are great business moves with tax advantages – whether or not it’s entity choice, whether or not it’s the accounting basis that we pick. In employee benefit plans, 401(k)s are great tax moves; investing in the business’ future with fixed asset purchases; taking advantage of bonus depreciation – all of those things are pieces of an overall tax strategy that are exceedingly important.
The bill would provide tax credits for use of efficient energy products, renewable energy and electric vehicles. Will this spur more investment from businesses?
Springfield, Missouri, actually has some of the cheapest electricity there is in the United States. Because of that, solar and renewable energy companies have made a judgment analysis that there are bigger fish to fry than southwest Missouri. I think we'll see that change as these credits become more lucrative. We'll see property owners and business owners have extended incentive to remodel and install energy efficient pieces to their existing buildings. There's also a number of credits for new vehicles. So, I would expect to see more Tesla charging stations and more energy efficient vehicles on the road.
A baked goods vendor at Farmers Market of the Ozarks expanded to a brick-and-mortar operation; the first lending center for Old Missouri Bank opened; and London Calling Pasty Co. added a new food truck.