Five separate rule changes that could touch grocery store co-ops and the community of nonprofits that support them.

As part of the grocery industry, we have all felt the pain of the recent inflation seen in our economy. Like many people, I have looked for the Biden administration’s response to the newest stage of these “unprecedented times.” Well, that response, at least in part, has happened. On August 16, 2022, the president signed into law the Inflation Reduction Act (IRA). The law itself is over 700 pages long, and practitioners from a variety of industries have now had some time to study it. While the bill’s effect on future inflation is indeed questionable, there is no doubt that it mandates the biggest climate-related investment made by the federal government in US history.

The intent of the package is to address inflation by lowering energy costs over the long term, by reducing health care costs for families, and by helping to reduce the deficit. As with any other legislation, there are other little gifts and caveats buried within. In light of the IRA’s upcoming $369 billion in expenditures, I had to ask, “How is this going to affect the grocery co-ops and other nonprofits that I work with?” Most of the organizations I have the privilege of serving understand that climate change is a big issue facing our country, and their leaders regularly make operating decisions with Principle 7—concern for community—in mind.

I have noted five separate rule changes that could touch our grocery store co-ops and the community of nonprofits that support them. I’m not planning on covering every detail of these, but do hope to provide general information. I suggest you discuss your situation with your tax advisor before taking any action.

Closing tax loopholes is a flashy idea that few people will argue with, and big corporations paying little to no income tax is without a doubt one of the loopholes the Democrats want to close.  The Inflation Reduction Act  does include a minimum tax on corporations, but I don’t expect this will affect any in our cooperative and nonprofit community. The rules establish a tax on any corporation with at least $1 billion in income—that’s billion, not million. While our community has many successful co-ops, none that I’m working with approach that size.

An additional tax on corporations included in the IRA is the 1 percent tax on stock buybacks. Since buying common shares back from cooperative owners is a common practice, this item caused me to raise an eyebrow. Thankfully, it is only applicable to publicly traded companies and does not apply to co-ops.

The Inflation Reduction Act also includes $80 billion to fund the IRS. That’s big chunk of change, right? What’s the IRS planning to do, you ask? The lead item of note is that the IRS plans to hire 87,000 new employees over ten years. Across my social media, I have seen a bit of anxiety about these numbers, as most people I know have a healthy fear of being audited by the IRS. So, let me provide a little context for this substantial allocation of funds.

First, the IRS budget has been significantly cut—by almost 25 percent since 2010, even though Congress has not stopped giving it work to do. The IRS’s role is to administer the tax laws and to enforce compliance when necessary. The past ten years have seen a quiet power struggle between the IRS and Congress, which has resulted in the budget cuts for the IRS. As with any organization, doing more work on a smaller budget is never easy or even recommended. Particularly since the pandemic, the IRS has had a lot of changes to accommodate and, frankly, has not done a great job of that. The new 87,000 employees (to be added over the next ten years) will replace 50,000 employees they expect to retire. And that 87,000 total is dependent on the IRS being able to find that many accountants, which are currently in short supply.

Will these new 37,000 employees mean a huge increase in audits to the co-ops? I seriously doubt it. Not all of these employees will be in enforcement; a percentage must be in operations—I hope answering the phones and reading the substantial backlog in paper mail. Most likely, our community stands to benefit, like almost any other taxpayer, by receiving better customer service from the IRS.

Also, the IRS has its own set of priorities when allocating its agents for audits. One of these priority areas seems to be the proper classification of a worker as an “employee” or a “contractor.” Most organizations do use independent contractors; if management is not clear about the factors to consider when classifying workers as an employee or a contractor, they might consider consulting their tax advisor.

While the IRA is primarily a climate investment bill, it achieves some of its goals through tax policy. Tax credits and deductions for clean vehicles, energy-efficient buildings, and clean energy production are addressed in this legislation. Remember, a tax credit is a dollar-for-dollar reduction of the co-op’s tax liability. An allowable deduction is an expense which lowers the taxable net income, thus lowering the amount of tax due.

A new tax credit of up to $7,500 for clean vehicles weighing less than 14,000 pounds, or $40,000 for those over 14,000 pounds, now exists for businesses. The credit is not a flat amount, but rather is a calculation based on cost and the type of engine. For co-ops considering the purchase of an electric or hybrid vehicle, this is exciting news. Prior years’ tax rules limited the number of credits issued each year and were limited to individuals. The new rules allow businesses and nonprofits to receive the incentive as well. Since nonprofit groups are not required to pay taxes, the new rules allow them to opt to receive a direct payment. The credits (or payments) are only available on qualifying cars that cost $55,000 or less and trucks, vans, and SUVs costing $80,000 or less. By capping the cost of the vehicles that qualify for the credit, the legislation intends to push the market into making clean vehicles more affordable.

Don’t rush out the door yet, however; this credit may not be applicable to clean energy vehicles that are ready for purchase now. A secondary policy goal is playing out here, one which encourages manufacturers to source battery components either domestically or from countries with which the US has “good” trade relations, and to manufacture or assemble more of the vehicle in North America. This means some very specific additional restrictions apply. For businesses, eligible vehicles must be depreciable property for the business and put in service (use) during the year the tax credit is taken. In addition to the requirements already mentioned, there are rules about the battery capacity and a requirement that the manufacturers have a written agreement with the IRS and provide periodic reports to them. Since the IRA is brand new, I’m not aware that any of these agreements exist yet.  However, if your co-op is interested in owning an electric vehicle or other clean vehicles, these new rules may mean that a purchase in 2023 makes sense.

Energy efficiency in commercial buildings has been addressed in the tax code for several years now. The tax code permits a deduction (per square foot) for qualifying projects. However, the IRA changed these rules to expand what building upgrades qualify. While the devil is always in the details, the new rules allow certain tax-exempt organizations to benefit. This is an expansion of the credits, because all nonprofit organizations were disallowed in the past. The overall result of the changes should be to substantially increase the number and amount of the incentives, allowing for more buildings to be eligible as well as smaller renovations to be eligible. For example, the new law lowers the required efficiency to 25 percent more efficient instead of 50 percent more efficient. This change should allow for smaller, more affordable projects to qualify for this tax deduction and is intended to encourage taxpayers to implement energy efficient practices.

Additional tax deductions are allowed for projects that meet certain wage and apprenticeship requirements (essentially, using union labor). Managers of large projects may need to consider whether to use low-cost labor or higher paid “union” labor and reap the additional tax benefits on the project. Co-ops contemplating energy-efficient upgrades in the near future should check with their tax advisor to determine whether the new Section 179D rules could benefit them.

The Inflation Reduction Act is a massive piece of legislation, and practitioners of all industries are awaiting additional guidance on the details of the implementation. The bill affects the for-profit and nonprofit sectors of society, as well as individuals. This article in no way attempts to be an exhaustive explanation of all that is in it, but rather highlights rule changes that could affect the cooperative community as boards and managers make business decisions—particularly within the context of Principle 7: concern for community.