How the Inflation Reduction Act Might Affect US SMEs

On August 16, 2022, US President Joe Biden signed into law the Inflation Reduction Act of 2022. The bill aims to curb inflation by cutting deficit spending, lowering the price of prescription medication, and investing in domestic energy production, especially renewable energy. It’s a landmark bill and its effects could be far-reaching. How might the bill affect small- and medium-sized enterprises, or SMEs?

The Inflation Reduction Act and SMEs

Legislation like the Inflation Reduction Act, or IRA, was necessary because of the high degree of inflation we’re currently seeing. Large amounts of consumer spending during the pandemic, supply chain issues, Russia’s invasion of Ukraine, fluctuating oil and gas prices, and years of remarkably low interest rates have all contributed to high inflation. Such a sudden spike in inflation is bad because it means goods cost more.

The IRA is meant to ease this. Many of the largest corporations are making record profits in 2022, so inflation hasn’t been a problem for them. For SMEs, however, inflation can be very concerning.Can the IRA really help?

A White House press release states that, “The Inflation Reduction Act will reduce costs for small businesses by maintaining lower health care costs, supporting energy-saving investments, and bolstering supply chain resiliency.” How will it do this? Well, first, it won’t tax them any extra. Small businesses and families making under $400,000 a year, which is 98% of Americans, are not taxed in the bill.

Second, the IRA doubles the refundable research and development tax credit for small businesses, raising it from $250,000 to $500,000. Small businesses can apply this credit to payroll taxes and other expenses, such as product development. In the long-term, the IRA will also bring down energy prices as the US can rely more on its own renewable sector. Will this be enough to help SMEs, though?

Verdict: the IRA is good for SMEs, but not drastically so

Increasing taxes on mega corporations, investing in domestic energy production, reducing the likelihood of future climate disasters, and helping Americans get more affordable pharmaceuticals all benefit SMEs. But most of the benefits are indirect, theoretical, or won’t be truly realized until years into the future. 

The truth is, there is no quick fix to inflation. Often, when governments have tried to interfere a lot to stop inflation, they have ended up making it worse. Consumers will likely have less purchasing power and will be less inclined to spend for the next year or two, or more. The IRA can ease the pain a little, but SMEs will have to be prudent and efficient to succeed in the coming years.

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