What Private Business Owners Should Know About the Inflation Reduction Act

August 16, 2023
  • Private Banking
Lewis Hart, our head of corporate banking, reviews the potential effects of the Inflation Reduction Act tax credits and more on private business owners.

Signed into law on August 16, 2022, the Inflation Reduction Act of 2022 (IRA) includes major provisions that address several main issues, including:

  • Climate change
  • Clean energy
  • Affordable healthcare

It also includes several tax credits and incentives aimed at small businesses and startups with a goal to energize and stimulate the U.S. economy. As the IRA begins to take effect in the coming months and years, private business owners will need to be increasingly aware of the act’s changes and possible benefits.

While much of the IRA is largely aimed at addressing climate change and benefiting smaller and/or underserved businesses, here we examine the IRA’s effects across four categories relevant to private business owners – clean energy, research and development (R&D), healthcare reforms, and corporate tax provisions – so that you can feel better informed and equipped to take advantage of the opportunities and benefits available to your business.

Clean Energy Tax Credits

The IRA directs $369 billion of spending and tax incentives toward clean energy and climate change provisions. Much of this funding is in the form of tax credits; with $216 billion of tax credits available to corporations, business owners are encouraged to invest in the clean energy economy and technology.

Along with encouraging private investments in the energy sector, these tax credits incentivize any businesses not previously involved with or using clean energy to consider new investments. Relevant tax credits available to private business owners include:

  • Deductions for energy-efficient commercial buildings
  • Credits for qualifying commercial clean vehicles
  • A two-year extension on investment tax credits (ITC) and production tax credits (PTC)

Overall, the IRA provides significant incentives for private business owners to get involved or invested in clean energy and puts many businesses’ net-zero climate goals within reach

Deductions for Energy-Efficient Commercial Buildings

A tax deduction is available for energy-efficiency improvements to commercial buildings. Eligible recipients are owners, long-term lessors, and designers of energy-efficient building property, and eligible improvements include lighting, heating, cooling, and ventilation. Depending on the increase to efficiency, you can receive anywhere from $0.50 to $1 per square foot, with deductions over a four-year period capped at $1 per square foot.

Credit for Qualified Commercial Clean Vehicles and Sustainable Aviation Fuel (SAF)

For businesses that use a fleet of company cars or commercial vehicles, the IRA provides an incentive to transition your fleet to electric. If you purchase qualified commercial clean vehicles, you can receive a credit that is equal to the lesser of:

  • 15% of the vehicle’s cost (30% for vehicles without internal combustion engines, or ICE)
  • The amount the purchase price exceeds the cost of a comparable ICE

This credit is capped at $7,500 for electric vehicles weighing less than 14,000 pounds and at $40,000 for all others.

If your business uses planes or is involved in the aviation industry, there is a tax credit available for the use or sale of SAF instead of petroleum-based jet fuel. To qualify, the SAF must be produced in the U.S., and the planes must be fueled with the fuel in the U.S. It is possible to receive a credit of up to $1.25 per gallon of SAF.

Extensions of the ITC and PTC

With the ITC and PTC, taxpayers can deduct a percentage of the cost of renewable energy from their taxes. The IRA extends these credits through at least 2025, when they will be phased out and replaced by clean energy investment and production tax credits, which will be functionally similar but not as tech-specific as the current credits.

The ITC and PTC are available to taxable business entities and certain tax-exempt business entities; the tables below outline qualifying projects and the available credit amounts. The available base credit amounts are 30% for ITC and $0.0275 per kWh for PTC, assuming all wage and apprenticeship requirements are met. If the project is greater than 1 megawatt, alternating current (the megawatt capacity of a solar-generating station), the base ITC credit is 6%, and the base PTC is $0.005 per kWh.

Project Eligibility for ITC/PTC R&D Credits

Eligible for ITC

Eligible for PTC

Eligible for ITC and PTC

  • Energy storage technologies
  • Microgrid controllers
  • Fuel cells
  • Geothermal (heat pump and direct use)
  • Combined heat and power
  • Microturbines
  • Interconnection costs
  • Biomass
  • Landfill gas
  • Hydroelectric
  • Marine
  • Hydrokinetic
  • Multiple solar and wind technologies
  • Municipal solid waste
  • Geothermal (electric)
  • Tidal

     Source: epa.gov

Credit Amounts for Eligible Projects


Amount for Projects Less Than 1 MWac (Cumulative)

Amount for Projects Greater Than 1 MWac (Cumulative)

Base Tax Credit

ITC: 30%

PTC: $0.0275/kWh

ITC: 6%

PTC: $0.005/kWh

Wage and Apprenticeship Requirements*



ITC: +24%

PTC: +$0.0225/kWh

     Source: epa.gov

*Requires a percentage of total labor hours performed by qualified apprentices.

More information on ITC/PTC qualifications and bonus credits can be found on the Environmental Protection Agency’s (EPA) website. We encourage business owners with upcoming capital expenditure plans to consider how these credits may affect the economics of certain projects.

Research & Development (R&D) Credits

R&D credits are available to any U.S.-based business incurring expenses while developing new or improved products on domestic soil. The Internal Revenue Service (IRS) provides a four-part test to determine your company’s eligibility:

  1. Eliminate uncertainty. The research must be carried out in order to eliminate uncertainty about the development of your product or process.
  2. Process of experimentation. You must show that activities include experimentation to resolve the uncertainty.
  3. Technological in nature. Your research must rely on “hard sciences,” such as engineering, chemistry, or computer science.
  4. Qualified purpose. The activity must be for the creation of a new or improved product for your business.

This incentive already existed as part of 2015’s Protecting Americans from Tax Hikes (PATH) Act, but the IRA doubled the available amount. As of January 1, 2023, the amount of the R&D credit that can offset payroll taxes for qualified small businesses doubled from $250,000 to $500,000. To qualify, your business must have less than five years of gross receipts and less than $5 million in gross receipts for the credit year. The additional $250,000 from the IRA can also be used against the employer’s portion of the Medicare tax, and the unused payroll credits will carry forward. Coupled with the IRA’s climate initiatives, the increased R&D credits may incentivize development of clean energy technology, such as carbon capturing and clean hydrogen, by startups and small businesses. If your activities are eligible, these credits could increase your business’s cash savings – so while the filing process may be lengthy, it might also be worthwhile.

Healthcare Reforms

A major provision in the IRA allows Medicare to negotiate prices of certain prescription drugs starting in 2026. The subsidies on healthcare premiums offered by the Affordable Care Act (ACA) are also extended until 2025. In addition, the IRA puts a $2,000 annual cap on out-of-pocket prescription drugs for Medicare users, starting in 2025.

For private business owners, this expanded and more effective coverage through Medicare and the ACA may help reduce the cost of employer-issued insurance plans to employees; however, not everyone is happy about this change.

On June 6, 2023, Merck filed a lawsuit against the federal government on the grounds that the IRA’s drug price negotiation program is unconstitutional, violating the First and Fifth Amendments. The Chamber of Commerce also filed against the IRA on June 9, arguing that it also violates the Eighth Amendment by imposing excessive fines against drugmakers who refuse to negotiate Medicare prices.

As these lawsuits progress, it will be important for private business owners to stay up to date on any developments, as an outcome in Merck and the Chamber of Commerce’s favor could have effects on the cost of employees’ healthcare plans.

Corporate Tax Provisions

The IRA contains several tax provisions that, although largely aimed at benefiting qualifying small businesses, are notable for all private business owners. Along with the clean energy project and R&D-focused tax credits discussed, there is a crackdown on large corporations. Let’s review some of the major tax-related changes as they affect private business owners:

No Change to the Carried Interest ‘Loophole’

Early versions of the IRA included a proposal to close the carried interest loophole found in Section 1061 of the tax code. This allows fund managers to apply the capital gains tax rate rather than the individual income tax rate to their share of profits from deals.

As it stands now, if fund managers hold these portfolio assets for three years, they are taxable at the lower capital gains rate; however, the IRA originally proposed that this holding period be increased to five years – not eliminating the loophole but tightening it significantly. While this proposal was not ultimately included in the IRA, the debate around it remains relevant and is something to monitor.

Increased Funding to the IRS

The IRA provides almost $80 billion in funding for the IRS, with $45.6 billion going toward tax enforcement and the rest toward streamlining and modernizing its operations. This increase in enforcement funding may mean that private business owners are at risk of more audits, as the White House has emphasized it aims to crack down on high-income and high-wealth taxpayers, including large corporations and partnerships.

15% Alternative Minimum Tax (AMT)

Effective January 1, 2023, there will be a 15% AMT for companies with an average annual adjusted financial statement income of more than $1 billion for any three consecutive years preceding the tax year. Exempt from the AMT provision are S corporations, regulated investment companies, and real estate investment trusts.

Those in the private equity industry should note that this new AMT doesn’t include an “expanded aggregation” rule, which means that it won’t apply to unrelated companies that would otherwise meet the $1 billion threshold (if they are owned by an investment fund). The Joint Committee on Taxation (JCT) estimates this provision will raise $222 billion over the next decade.

1% Excise Tax

The IRA imposes a 1% nondeductible excise tax on public company stock buybacks, which the White House says will encourage businesses to invest. This tax applies to publicly traded domestic corporations for repurchases of stock after 2022 and was added to the IRA to replace the revenue lost by removing the carried interest provision. The JCT estimates this excise tax will raise $73.6 billion over 10 years.

Two-Year Extension on Excess Business Loss (EBL) Limitations

As defined by the IRS, an EBL is the amount by which the total deductions attributable to your trade/business exceeds your total gross income from those trades/businesses, plus a threshold amount adjusted for cost of living. The EBL rules were set to expire in 2027, but the IRA extends them until 2029.


Navigating Inflation Reduction Act of 2022 Tax Credits

While these changes may elicit some concern among private business owners, with proper planning opportunities, our Values-Based Wealth Planning team may be able to help those who would otherwise be negatively affected come up with strategies for navigating the IRA’s tax policies.

Overall, as the IRA continues to take effect throughout 2023 and beyond, it is important to be aware of its implications so you can capitalize on opportunities for your business.

If you are interested in discussing your options further reach out to a BBH relationship manager or wealth planner.


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