Inflation Woes Bogging You Down? Here’s How To Cut Your Business Tax Bill
More than 88% of small business owners say inflation tops the list of concerns. Here are a few steps you can take to cut your tax bill and keep your business afloat.
These days, being a small business owner feels a lot like being a character in a video game. Just when you think you’ve overcome one challenge and conquered the world, there’s another battle lurking just around the corner. In real life, many small business owners are navigating unfamiliar territory. With mounting financial pressures impacting businesses, it’s not hard to see why many entrepreneurs wish they could just turn the game off.
Roughly 88% of small business owners say soaring inflation remains a top concern in their business, followed by supply chain issues, and hiring challenges, according to a new report from Bank of America. In an effort to counter surging costs, many businesses have been forced to raise their rates, cut overhead expenses, or put their hiring goals on hold, all of which can be risky moves when it comes to serving customers.
Talk about a double-edged sword.
With current economic conditions expected to persist throughout 2022, it’s reasonable for small business owners to feel gloomy about the impacts of inflation on their business — and their business taxes. So, here’s a bit of good news: if your business is feeling weighed down by inflation, there are several steps you can take to cut your tax bill.
Let’s explore three strategies to help your business level up.
#1 Forecasting and projections
You can’t know where you’re going until you know where you’ve been, especially when it comes to running your business. That’s why learning the process of forecasting — a combination of tools and techniques used to predict changes in business, like sales, expenditures, profits, and losses — is such a valuable skill. Forecasting empowers small business owners to make proactive, informed business decisions, which are crucial during periods of high inflation.
To create business projections, dig into your financials. Take a look at your profit and loss, income, and cash flow statements, and your balance sheet. You should also review your accounts receivables and payables.
| 88% of small business owners say inflation is a top business concern.
You can also create a tax projection, using your income and deduction information from your last tax return, and adjust it for changes in the current tax year (such as changes in income, tax rates, or potential deductions.) This can help you eliminate surprises, plan and save for future tax bills, and may help you minimize your tax liabilities overall.
#2 Cost of Goods Sold (COGS)
It may seem counterintuitive, but there’s actually a benefit in spending money, as it reduces your overall taxable income. We see this through expenses but also through the Cost of Goods Sold, sometimes referred to as the Cost of Sales or COGS.
COGs is defined as the direct costs of producing the goods sold by a company. It includes things like the cost of materials and labor used directly to create the good. It does not include indirect expenses, such as distribution or sales.
COGS is important to business owners and instrumental to tax planning because it is subtracted from a company’s sales to determine its gross profit (e.g. recorded as a business expense). This means your COGS directly decreases the taxable income of your business.
With supply chain issues ongoing, paying special attention to COGS will be a great use of your time, especially if your inventory system is based on the LIFO (Last In, First Out) method.
Unfortunately, if you use LIFO there is a possibility that your taxable income will increase if you increase your business prices to keep up with inflation. If your business rates increase, but your COGS stay the same or decrease, this will increase your taxable income. One way to avoid this snag is through tax planning and budgeting; this will assist in the growth of a tax burden your business is likely to have if your inventory system is based on LIFO. In order to take full advantage of COGS treatment, make sure your books are in order and your bookkeeper or accountant are making the necessary classifications to obtain the full benefit of your purchases that qualify for COGS categorization.
#3 Take advantage of the Employee Retention Credit
Claiming business expenses increases your tax deductions and decreases your business taxable income, but claiming tax credits is what actually puts money back into your pockets. That is where the benefit of the Employee Retention Credit comes into play.
While many business owners have put hiring goals on hold, there is actually a benefit to growing your team. During the pandemic, the government enacted the Employee Retention Credit under the CARES Act, which was recently extended to encourage businesses to keep employees on the payroll.
The refundable tax credit is equal to 50% of up to $10,000 of qualified employee wages. Employers can get immediate access to the credit by reducing employment tax deposits they would normally make. If the payments are less than the credit, you could receive a refund directly in a check from the IRS.
For 2021 purposes, you can still claim this credit. And yes, solopreneurs are eligible for this tax break.
Stay above the noise
When the economy is headed for a cliff, it can be easy for small business owners to get caught up in the chaos. The key is to stay above the noise and keep your eyes focused on maintaining the viability of your business. Get familiar with tax deadlines, advantages, and incentives to help pad the impacts of inflation and other economic woes, and set up your business for future growth and success.