With inflation rates reaching historical highs and driving up the cost of doing business, business owners are seeking out creative ways to fight inflation. The Series I Savings Bond is one tool that’s been getting some buzz.

Also known as I Bonds, these low-risk savings products depend on higher inflation to produce better returns. The higher the inflation rate, the more interest you earn, rendering the investment inflation-proof. And they’re not just available to individuals. Business owners can buy I Bonds for multiple entities, including corporations and partnerships. There are rules specific to I Bonds, and there are more tax considerations for businesses than for individuals. To take full advantage of I Bonds, business owners must know the compliance and reporting rules.

How I Bonds work

A Series I Savings Bond is a security that earns interest based on both a fixed rate and a variable rate based on inflation. The fixed rate will remain for the life of the bond, whereas the variable changes every six months based on inflation levels measured in the U.S. Consumer Price Index.

I Bonds will earn interest for up to 30 years if they aren’t cashed out before then.

I Bonds vs. inflation

One of the advantages of I Bonds is they shield money from inflation. Based on current rates, the returns on an I bond are slightly outpacing the rate of inflation.

The U.S. inflation rate reached 9.1% in June, a 40-year high for the cost of the nation’s goods and services. By comparison, the current interest rate on new Series I savings bonds is 9.62% where it will remain through October 2022.

It’s worth noting this rate applies to the six months after the bond is purchased. So even if you buy an I Bond in October 2022, the bond will earn 9.62% interest for the next six months.

When leveraged and reported appropriately, I Bonds can generate respectable returns.

How to Buy I Bonds

While individuals can purchase I bonds electronically and in paper form (up to $5,000 each year by using their federal income tax refund), businesses, including corporations, partnerships, and other entities, can only do so in electronic form.

To purchase I bonds electronically, buyers must set up an account on TreasuryDirect, the federal government’s clearinghouse for purchasing and cashing in U.S. savings bonds, where they can purchase up to $10,000 in electronic bonds each year. However, if you own multiple business entities, each one can buy up to the $10,000 maximum, as long as the money is in a separate account for each business.

If you’re buying both personal and business I Bonds, keep them in separate accounts and avoid transferring funds from one account to another if you have purchased the annual maximum for both.

Tax Considerations

Series I Bonds are not subject to state or local taxes, but federal taxes are required on any interest you earn. You can choose between one of two methods to pay these taxes:

• Cash: You won’t pay tax on your bonds until you redeem them, so you can defer reporting the interest until the bond matures or you cash it in.
• Accrual: You will report and pay tax on the interest you earned for the year.

Any interest you earn on an I bond must be reported on Schedule B of Form 1040.

Gifting

There are considerable differences when it comes to tax breaks for individuals and businesses:

• Individuals can qualify for a gift tax exclusion, which for 2022 is up to $16,000 per recipient. That means an individual could give to 10 different people — a total of $160,000 in gifts — and not have to pay any tax. They also can get an exemption if they cash out their bonds to pay for education expenses.
• Businesses and trusts cannot buy I bonds as gifts or receive them. They also can’t qualify for the exemption, even if the money is used for certification or continuing education.

Cashing in

The minimum term of ownership for an I Bond is one year. If you redeem your bond before the five-year mark, you will forfeit the interest from the previous three months. There is no interest penalty after that point

I Bond compliance and reporting can get complicated, especially when managing a business in a challenging financial climate. If you need help navigating the savings bond landscape, our team of professionals can help you take full advantage of this investment vehicle.