The Democrats' $437 billion tax and climate bill is here. 4 ways your taxes could change in its wake

With the Democrats' $437 billion climate and tax package set to pass, businesses may want to give more thought to the second part of this description: taxes.

In a vote on Friday, the Inflation Reduction Act (IRA) passed the House of Representatives along party lines. The legislation, which has already passed the Senate and is now going to President Biden for signature, aims to quell record inflation by reducing the federal deficit and lowering drug prices, while making a sprawling $369 billion investment in clean energy. This is the largest investment in the fight against climate change to date. Taxes on the wealthiest individuals and big corporations, along with prescription drug price reform, will largely fund the law.

Notably, lawmakers say the IRA does not raise taxes on small businesses. But this does not mean that entrepreneurs are not affected by the law. Here are some key changes to watch out for.

A stronger IRS

The Internal Revenue Services will get an $80 billion boost from the IRA, as more than half of that will go to enforcement, much of it to fill the difference between taxes owed and the amount of taxes collected by the government. This gap is estimated at $600 billion a year, according to the US Treasury Department. The IRS believes that individuals are the main contributors to the tax gap, rather than corporations, according to an analysis of IRS data from 2011 to 2013.

The investment is expected to improve the IRS' lagging technology capabilities, which could help the agency close the tax gap as it ramps up enforcement. While this increased authority is intended to make the tax system more efficient, experts say it will also increase audits. Those who see unpaid taxes recouped will likely also face penalties.

Companies need to be proactive in keeping records beyond their traditional tax forms, according to Wendy Walker, solutions manager at Wilmington, Massachusetts-based Sovos Tax Platform. This is because business tax returns, by design, tend not to be comprehensive, so it's a good idea to keep chargeback records, refund records, and reversed transactions and maintain an effort. to stay organized. “Businesses need to be able to reconcile the amount of Form 1099-K that is being reported against what they are actually reporting as income on their tax return,” Walker says.

Excise tax on redemption of shares

An older version of the law targeted the private equity industry in a bid to close the so-called carried interest tax loophole. However, in the latest version of the bill, this element has been replaced by a 1% charge on share redemptions. Such a tax would come into effect if a listed company buys back its own shares to increase the value of the remaining shares in the market.

While this clearly seems to only affect publicly listed companies, one stakeholder remains at risk: employees. Robert Kimball, a partner at the Houston, Texas-based law firm Vinson & Elkins, points out that the tax can hurt employees by penalizing the benefits of stock buybacks.

The tax could also impede access to capital, says Jennifer Blouin, an accounting professor at Wharton. "A lot of entrepreneurs get seed capital or investment from big public companies, and then all of a sudden that capital got a little more expensive."

Excess Loss Limitation

Limits on the amount of losses a company can write off will be extended for two years. The provision, called Excess Business Loss Limitation, was first authorized under the Tax Cuts and Jobs Act of 2017, which Donald Trump signed into law. It was settled...