Buckle Up: What Inflation Control Means for Small Businesses

There is no way to spoil this. Small businesses should be deadly scared about the effects of the anti-inflation laws. Unless you provide goods and services to the green energy industry, the unforeseen consequences of legislation can increase operating costs in two ways. Here’s what to expect and how to prepare.

The Inflation Reduction Act is basically a climate change law with health care benefits. The new law does not include direct tax increases for small businesses, but some of its provisions could significantly increase costs for these businesses.

The first reason business costs may rise

First, you may be more likely to be audited. The new bill significantly expands the Internal Revenue Service’s budget. More than half of his $80 billion increase in the IRS budget over the decade will be used to strengthen enforcement through new technology and new jobs. This means more audits of companies with the lowest financial management capabilities. Companies with gross revenues below her $5 million usually don’t have the extra money to pay lawyers $50,000 to fight the IRS if the matter goes to court. I’m worried

In a letter to the Senate, the agency’s commissioner said, “These resources are not for increased audit scrutiny of small businesses and middle-income Americans.” Still, hiring a new auditor increases the likelihood that someone with little or no experience will lead the audit. The resulting errors can force businesses to take disputes to tax courts or to settle them. Either way, the cost in time and money can be substantial.

This is just one example of what I think happens more often. I currently represent a property developer who borrowed $6 million from a bank to finance a new development. The young auditor, who majored in history in college and had no accounting or business background, received a 300-page loan from the bank in his binder and a letter from the bank’s president saying the loan was being repaid. I redefined loans as income, even though I had them. .

My client received a $2 million tax bill because the auditor reclassified the loan as income. I am currently going to tax court on behalf of my client to prove that the loan is not income. We expect to see more stories like this as the IRS expands and exercises its enforcement powers.

The second way corporate costs rise

Counterintuitively, the new law could also raise fuel and electricity costs. Green energy cannot currently replace the stability of fossil fuel energy. The technology to store wind and solar power is not yet available.

To be fair, the law allocates $386 billion for climate change, energy spending and tax relief, and expands the use of green technology, which is still not entirely reliable. Look at France and Germany. The Green Energy Initiative is not providing enough electricity to make up for the reduced electricity supply caused by reactor repairs and a decline in Russian gas imports.

I also fear that the new law will reduce investment in fossil fuels and raise the tax rate on certain crude oil and petroleum products to 16.4 cents per barrel. This could add to already rising power and electricity costs. This, too, can hit small businesses.

5 things companies should prepare for

Businesses should now prepare for the potential negative impact of anti-inflation laws. Method is as follows.

• Suppose you are audited. If the IRS audited your entire filing, what would they find? that.
• Dedicate more resources to record keeping. Keep original receipts to document the business purpose of all expenditures. If you travel to pay for a business dinner or sponsor an event, record it. Not only should you be able to record your expenses, but you should be able to prove them with receipts and demonstrate how they help your business. Don’t cheat the numbers. The worst thing you can do is send your tax adviser for an audit without doing anything to verify the accuracy of your deductions.
• Be aware of certain tax credits and tax credits. If you declare a tax break for a particular substance, the IRS will be interested in auditing it. increase. This year’s list includes two deals that the IRS currently hits small businesses and their owners. — Syndicated land conservation easements and captive insurance. These strategies are legal, but make sure you’re doing it with a reputable vendor who executes the strategy properly.
• Be open and honest with your tax advisor and expect the same. Demand that your tax filer answer your questions and know what they are doing.
• Be aware of costs and profitability. If energy prices rise as I expect, we will be stuck in this inflationary cycle for the foreseeable future. Scrutinize the prices of services and products. Be prepared to strategize smart ways you can pass on these higher costs to your clients and customers.

America is a strong and resilient nation, fueled in large part by the integrity of small businesses. It’s up to us to understand the unforeseen consequences of this new law and protect ourselves as best we can.

This article was written by and represents the views of a contributing advisor, not Kiplinger’s editorial staff. Advisor records can be reviewed with the SEC or FINRA.

Founder, American Tax and Business Planning

Bruce Willey has been working with small businesses across the country for over 10 years helping them navigate business and tax law in a variety of situations. His services include assisting with business start-up, operations, growth, asset protection, exit planning and estate planning.