FEBRUARY 08, 2023 | PUBLISHED IN
by Eric Hylton, Former IRS Commissioner of the Small Business/Self Employed Division; alliantgroup National Director of Compliance and Kathy Petronchak, Former IRS Commissioner of Small Business/Self-employed Division (SB/SE); alliantgroup Director of IRS Practice & Procedure
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The Inflation Reduction Act has created opportunities–and some risks. Here’s how to manage both.
The Inflation Reduction Act (IRA) is potentially transformative for small- to medium-size businesses (SMBs), but along with taking advantage of the new benefits it and other government programs have to offer, SMBs must be aware of critical nuances that could impact their tax filing this season.
How the IRS will specifically use the sizeable increase in IRA funding remains to be seen, but regardless, it will improve its capacity to audit American taxpayers, so new questions are arising about whether SMBs will see increased scrutiny. Meanwhile, cryptocurrency reporting requirements could also complicate this filing season.
Amid these concerns is the opportunity for small businesses to claim powerful credits and incentives. Here are the key considerations American SMBs should be aware of this filing season.
Take advantage of the IRA, but prepare for increased scrutiny.
Treasury Secretary Janet Yellen stated the IRS would not use any additional funding to increase the number of small businesses “below the $400,000 threshold that are audited relative to historical levels.” Along those same lines, former IRS Commissioner Charles Rettig noted that increased IRS funding make up resources that “are absolutely not about increasing audit scrutiny on small businesses or middle-income Americans.”
Despite these reassurances, the answer as to whether SMBs will see increased scrutiny is still a bit murky. There is more nuance involved, such as whether the owners of pass-throughs will be the target of the actual tax audit. Yellen’s “historic levels” comment also needs to be clarified, especially since audit rates have dropped significantly over the past ten years. As such, American SMBs should err on the side of caution and assume the agency will at least bolster the effectiveness of their existing audit system with its new funding.
Search for other tax benefits outside the IRA
Outside of the IRA, there are several tax benefits for American SMBs to take advantage of.
Beyond the doubled R&D Credit for startup businesses, small companies that are profitable are eligible for a tax credit based on their innovation efforts (working to change their products or processes). Other tax credits or deductions that small businesses should consider include:
- 199A Deduction for pass-through businesses that involve specific changes for the 2022 tax year
- 179D Energy Efficient Commercial Buildings Deduction
- The Employee Retention Credit created under the CARES Act
In short, there is money out there for qualified businesses that many simply don’t take advantage of. Taxpayer businesses should ask their tax professional to walk them through each tax credit or deduction they might qualify for.
Dabbling in crypto? Be aware of what’s required of you
Digital currencies have seen their fair share of ups and downs in the past year, but there is no sign that the crypto space is going away. In fact, the IRS has repeatedly communicated that their compliance efforts will be making crypto reporting a key focus in the next several years.
Individual taxpayers are required to disclose digital assets to the IRS using their Form 1040 (or Form 8949, in the case of the sale of those assets), however, American businesses that accept digital currencies as payment also need to make the service aware of any crypto transactions in which they have taken part.
Prepare for success this tax season
In the end, American SMBs have a myriad of tax filing obligations, and should discuss these with their CPAs or tax professionals. They should also ensure transparent conversations regarding prior and planned business activities.
By engaging in these types of conversations and taking the time to think about what tax positions are most beneficial for them, taxpayer businesses, particularly those on the smaller side, will see outsize benefits. This tax season can be an opportunity for any SMB to engage in more active tax planning, ensuring it’s prepared for a potential audit, and exploring overlooked incentives to see success.
About the Author
Eric Hylton held several prominent positions at the IRS, including serving as Deputy of the Criminal Investigation Division and as CI’s head of International Operations. As National Director of Compliance, Eric employs his years of experience at the IRS to assist alliantgroup’s clients as an ambassador for U.S. small and medium sized businesses (SMBs) and in helping others become tax compliant.
Kathy Petronchak is the Director of IRS Practices and Procedure at alliantgroup and is part of the alliantnational group in Washington, DC. In this role, she serves as an invaluable resource on a wide range of issues related to IRS procedures, such as foreign bank account reporting, alternative dispute resolution; statute of limitations; account problems, collection issues, and penalty issues. She also assists in representing clients before the IRS with an examination or appeal issue. She specializes in the area of tax controversy services, providing support for clients in their issues with the IRS.
