Inflation Reduction Act: How to Protect Yourself as a Small Business Owner
When President Biden’s new Inflation Reduction Act was signed into law on 16 August 2022, a lot of people became worried.
“Am I going to be audited?”
“Do I have to pay more in taxes now?
“Will the IRS be cracking down on small business owners?”
These were the types of questions from concerned entrepreneurs and small business owners that flooded my inbox.
Well, I know that big changes to laws (especially if they involve the IRS!) can be stressful if you don’t know how it affects you or your business.
That’s why in this article, I’m giving you the full update on the Inflation Reduction Act – what it is, how it impacts small business owners and entrepreneurs like you, and what you can do to protect yourself.
What is Biden’s Inflation Reduction Act?
Intended to build a better economy that supports workers and families, the Inflation Reduction Act addresses a variety of areas. These include lowering prescription drug costs, health care costs, and energy costs while also tackling the climate crisis.
One of the key aspects of the Inflation Reduction Act that has caught the attention of small business owners in the US is the generous funding allocated to the IRS. The Inflation Reduction Act sets aside almost $80 billion for the IRS over the next 10 years to strengthen tax collection and enforcement, modernize antiquated systems, and improve taxpayer services. Additionally, reports suggest that part of this funding will be used to hire 87,000 IRS employees.
Understandably, small business owners are worried about how this will impact them.
How does the Inflation Reduction Act Affect Entrepreneurs?
We all know that the IRS is in desperate need of radical change in its processing, communications, and systems. The funding provided by the Inflation Reduction act gives them the opportunity to provide better support to taxpayers while identifying and cracking down on non-compliant businesses and organizations.
The big question on everybody’s mind is: Will this affect entrepreneurs and small business owners?
Treasury Secretary Janet Yellen and IRS Commissioner Chuck Rettig have both issued commitments that the increased funds for the IRS will not go towards the audit of taxpayers who earn less than $400,000 per year. The Biden Administration and Democrats also gave similar reassurances when passing the Bill.
That said, this remains a verbal commitment at the time of writing. Republicans on the Senate Finance Committee are pushing for an amendment to the bill to put this commitment into writing, but this may or may not happen before tax season 2023.
Will I get Audited Under the Inflation Reduction Act?
If you are afraid that you will be audited due to the expanded budget of the IRS under the Inflation Reduction Act, you are not alone.
The original intention for increasing funding to the IRS was to crack down on the high-wealth taxpayers like millionaires and billionaires, and large corporations that have been evading tax obligations for years. Essentially, this bill is going after the “big fish”.
This takes the focus away from small discrepancies in reporting or underpayment of taxes by middle-class families and small business owners. Tentatively, we can expect that entrepreneurs or families making $400,000 or less will not see any effect on their taxes.
However, does this mean that there is zero chance of being audited?
Unfortunately not. There is no guarantee that your business will not be audited in the upcoming tax season or in the years to come. As small business owners, it is wise to take steps to protect our businesses from potential audits.
The Inflation Reduction Act: How Can You Protect Yourself as a Business Owner?
The biggest concern the Inflation Reduction Act poses for small business owners is being audited. The simplest and easiest way to 1) avoid being audited, and 2) come out on the right side if you do get audited is through your bookkeeping.
Bookkeeping is the financial foundation of your business and it connects your business to the IRS. To put it simply, your bookkeeping records are what appear directly on your tax return. Keeping proper records is a must if you want to protect your business in light of the changes the Inflation Reduction Act will bring about.
Here are three simple yet powerful tips to get your books in order and protect you and your business down the road.
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1. Create a Bookkeeping System for your Business
If you do not already have accounting software or some type of bookkeeping system for your business, it is time to set something up. For a small business just starting out, an Excel spreadsheet could be sufficient or you can set something more comprehensive using professional accounting software like Quickbooks or Wave.
Whichever option you choose, having a system in place will help keep a history of your business income and expenses in the event of an audit by the IRS or if they ask for substantiation. Need help with sorting out your books? Get in touch with us for a free consultation.
2. Separate Business from Personal
Don’t mix business with pleasure is a common saying but there’s nowhere else it’s more true than in your finances! It may be easier to have a single bank account for your personal and business finances but this is a risky move.
In the event of an audit, it becomes much harder for you to substantiate valid business expenses to the IRS. It is likely that the IRS will completely reject all your business expenses if they cannot determine which ones are personal and which ones are business-related. Play it safe and keep all business income and expenses in accounts dedicated just to your business.
3. Keep Your Receipts
Despite all the changes the Inflation Reduction Act will bring about, the IRS has not changed the law regarding receipts. At any time, the IRS can always ask for substantiation for entries in your accounting software and bank statements. A simple solution to this is to keep all your electronic receipts in a Google Drive folder or create an inbox folder for your digital receipts. This simple step can help audit-proof your business if the IRS ever comes knocking.
Moving Forward with the Inflation Reduction Act
The Inflation Reduction Act is a new law and we cannot be certain how it will play out or impact our businesses going forward. What we can control is how we set up our business finances.
Hiring a bookkeeper is a simple fail-safe way to protect your business. It gives you peace of mind knowing that your business finances are taken care of with professional support and proper systems in place.
If you are ready to audit-proof your business and ensure that you are prepared for anything the IRS may throw your way – we can help. Book your free consultation call here.