Hang Out: What the Depreciation Act Means for Your Small Business

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There’s no way to sugarcoat this: Small and medium-sized businesses should be scared to death of the consequences of the Depreciation Act. Unless they provide goods and services to the green energy industry, the unintended consequences of the law will increase their operating costs in two ways. Here’s what to expect—and how to prepare.

The Inflation Reduction Act is a climate change act with some health care benefits. While the new law does not include any direct tax increases on small and medium-sized businesses, some of its provisions have the potential to add significant costs to these companies.

The first reason why business value increases

For one, your chances of getting audited may increase. The new bill dramatically expands the Internal Revenue Service’s budget: More than half of the IRS’s $80 billion budget increase over 10 years will be used to strengthen enforcement through new technology and new hires. That means more auditing for companies that are too small to manage them financially. I worry about businesses that bring in $5 million or less because they don’t have a lot of money to pay a $50,000 lawyer to fight the IRS if their case goes to court.

In a letter to the Senate, the agency’s commissioner said, “These resources are absolutely not about increasing audit scrutiny of small businesses or middle-income Americans.” Even so, hiring new auditors may lead audits with less experience. Errors resulting from this may force businesses to take disputes to the Tax Court or settle them. Either way, the cost in time and money can be high.

Here’s an example of something that I think happens over and over again: I’m currently representing a real estate developer who borrowed $6 million from a bank to finance a new development. A young auditor who majored in history in college and had no accounting or work experience turned the loan into income, even though we had a 300-page loan agreement from the bank and a letter from the bank president saying the loan was being paid off. .

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

A second way is that the cost of doing business can increase.

Conversely, the new law could increase fuel and electricity costs. Green energy currently cannot replace the stability of fossil fuel energy – the technology to store wind and solar energy does not yet exist.

To be precise, the Act allocates $386 billion in climate and energy spending and tax relief to expand the use of green technology. Look at France and Germany, where green energy initiatives have not provided enough power to offset electricity imports due to nuclear reactor maintenance and reduced Russian gas imports.

In addition, the new law will reduce investment in fossil fuels and increase the tax rate on some crude and oil products by 16.4 cents per barrel. This can increase energy and electricity costs, which are already increasing. That can also affect small and medium-sized businesses.

5 things businesses should do to prepare

Companies should prepare now for the potential negative effects of the Depreciation Act. Here’s how:

  • Imagine being audited. What will you get if the IRS audits your full return? If there is something out there, at least address it now to reduce the risk in the future. Be true to yourself.
  • Provide additional resources for enrollment. Keep original receipts to document all expenses for business purposes. If you go on a trip and spend a business dinner or sponsor an event, document it. Don’t just document the expense: you need to be able to back it up with receipts and show how it benefits the business. Don’t erase the numbers. The worst thing you can do is send your tax advisor to audit you to verify the validity of the deduction.
  • Be aware of certain tax credits and tax deductions. If you claim certain tax deductions for any item, the IRS will be interested in checking the maximum amount. Each year, the IRS publishes a Dirty Dozen list of “Abusive Arrangements Taxpayers Should Avoid.” This year’s list includes two events that the IRS is currently hitting small and medium-sized businesses and their owners with. Integrated Land Conservancy Facilitation and Captive Insurance. While these strategies are legitimate, make sure you are working with a reputable seller who executes the strategies properly.
  • Be open and honest with your tax preparers and expect the same from them. Ask your tax preparer to answer your questions and understand what you are doing. If they fail at both, find a new tax preparer.
  • Be aware of costs and profitability. If energy prices rise as I expect, we will be in this inflationary situation for the time being. Check the price of your services and products. Be prepared to plan smart ways to pass on those high costs to clients and customers.

The United States is a strong, resilient nation, supported heavily by the integrity of small and medium-sized businesses. It is up to us to understand the unintended consequences of this new law and protect ourselves as much as possible.

Founder, American Tax and Business Planning

Bruce Wiley has been working with small to mid-sized businesses across the country for more than a decade, helping them navigate business and tax law in a variety of situations. His services include assisting with business startups, operations, growth, asset protection, exit planning and estate planning.



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