The Inflation Reduction Act Impact
Passage of the Inflation Reduction Act may or may not reduce inflation, but it will certainly have consequential impact on businesses, the climate and the financial viability of Medicare.
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The Inflation Reduction Act Impact
Passage of the Inflation Reduction Act may or may not reduce inflation, but it will certainly have consequential impact on businesses, the climate and the financial viability of Medicare.
The Impact on Large Businesses
Public companies will see their taxes rise, stemming from a new corporate alternative book minimum tax, which imposes a 15% minimum tax on adjusted financial statement income (AFSI) for corporations with average annual AFSI over three years in excess of $1 billion, effective for tax years beginning after Dec. 31, 2022.
Additionally, a 1% excise tax will be levied on corporate stock repurchases based on the value of stock repurchases (net of stock issuance), effective after Dec. 31, 2022.
These two new taxes are estimated to reduce corporate earnings in 2023 by 3%, according to JPMorgan.1
Fossil fuel companies may see an additional bite on their profits through the reinstatement of the Superfund tax on crude oil and imported petroleum products, indexed to inflation, beginning next year and running through the end of 2032.
Pharmaceutical companies might also see margins squeezed due to the introduction of drug price negotiation authorization given to Medicare, which we’ll delve into a bit more later in this article.
Some large businesses stand to benefit, including companies in the alternative energy space through a range of climate provisions, such as wind and solar tax credits, new tax credits for emerging technologies (e.g., clean hydrogen), simplified and expanded carbon capture tax credit rules, and EV and charging infrastructure credits.
The Impact on Small Businesses
Perhaps two of the most consequential aspects of the Inflation Reduction Act for small businesses are:
- Provisions to extend the Affordable Care Act subsidies, which may lessen the financial burden for employees, but may increase the chances of a business (50 or more employees) getting penalized for non-ACA compliant health insurance. One possible solution for avoiding any potential penalty situation is by switching from a group plan to an individual coverage health reimbursement arrangement.
- Funding in the amount of $80 billion to expand and modernize the IRS may increase the likelihood of IRS audits. This means that small businesses will need to improve their recordkeeping and compliance, which may translate into higher costs and lower profits.
The Impact on Medicare
As a result of the Inflation Reduction Act, the secretary of the Department of Health and Human Services has the authority to negotiate high-cost prescription drug prices starting in 2026 with 10 specific drugs, growing over time to up to 100 drugs. Pharmaceutical companies will also have to rebate to the government, starting in 2023, any drug price increases above inflation.
Unless pharmaceutical companies can pass these costs to the commercial market or reduce R&D, the profits may suffer. However, consumers will benefit through lower drug costs, with caps on insulin ($35), as well as annual out-of-pocket drug costs ($2,000) and means-tested subsidies.
Inflation is certainly making an impact on consumers and entities of all incomes and sizes. Consider these inflation survival tips to minimize the impact. It’s also not a bad idea for financial professionals and clients to revisit and stress test their financial plans to combat inflation.
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