Welcome to the topic “How Inflation Impacts Business Taxes”
How inflation impacts business taxes
Inflation is one of those topics that are constantly under debate. It is talked about by policymakers, trying to minimize the effect of this phenomenon. It is also given much importance by consumers, who are bearing the impacts of this daily.
In simple words, Inflation is the increase in commodity prices such as goods and services over time. This overall increase in prices leads to a decrease in the purchasing power of the people. As a result, people are getting less than what they were used to.
This affects the overall living standard of people of that country. As a result of the recession period created by the covid-19 pandemic, there has been an increase in global inflation.
The impact of inflation on consumers is not that difficult to understand, but they are not the only ones dealing with this decrease in purchasing power. Businesses, regardless of size, are impacted by inflation in various ways.
Impact of inflation on businesses
The impact inflation has on business vastly differs from the type of business it is. Some businesses that are involved in the selling of nonessential items will be most impacted by the increase in prices.
People will give the essential goods more priority as compared to these goods. This will directly impact the business causing them to make a margin on sales they were making before. Some impacts of inflation that are common regardless of the type of business are:
Increase in costs
A common factor that can be observed when there is an increase in inflation is the subsequent increase in prices for consumers. For businesses, it is the increase in the cost of capital and essential goods and services. When there is an increase in the cost of materials, the profit margin of the business is impacted by it.
To maintain the pre-inflation margin, the business will have to reassess its costs. The most common outcome in these cases is that this extra burden is passed on to the consumers by increasing the price of the product or service being offered by the business.
Unsatisfied consumers
When the cost of producing the good or service increases, the price is often passed on to the consumers. This impacts the purchasing power of consumers. They will essentially get the same amount of product for a higher price than what they were previously getting.
This increase in prices by the business will impact the relationship it has with its customers. The customers will be essentially displeased, to say the least, by this move by the business to increase the prices of their products and services.
Issues in the supply chain
Another problem that can arise during the period a business is effectively trying to deal with the impacts of inflation is a disruption in the supply chain. If the price of the material that is required for a product increases and there is no impact on the demand there will be a supply chain disruption.
This occurs when there are too many consumers and too few products available for these consumers. This further depletes the profit margin of a business and they start to bear the immense burden of inflation.
Increase in interest rates by the state banks
A method often used by state banks to control this inflation is to increase interest rates. This increase in interest rates decreases spending in the economy. As the interest rates are increased, it becomes difficult to borrow money, and subsequently, there is less money going around in the economy. This does not only impact the consumers, it also impacts the businesses as it hampers their ability to borrow money.
What are business taxes?
Business taxes refer to the sum of money that is paid out to the government for conducting business operations. The amount of this tax depends on various aspects such as the size of the business as well as the type of business that is being run. This is a direct form of tax that is imposed on either the capital of the company or the profits that are being enjoyed by the company.
There are five different types of business taxes:
1) Gross-receipt tax
This refers to the tax that is imposed on the gross revenue of the company regardless of the source it is earned from.
2) Corporate franchise tax
Corporate franchise tax refers to the tax that is imposed for doing business in a certain state or city. This tax varies from state to state, and from city to city.
3) Value added Tax
This is a type of tax that is applied to all stages of the product. Unlike sales tax, the value-added tax is paid at multiple stages of production of a certain product by multiple parties that are involved.
4) Excise tax
This refers to the tax, which is collected for a product at the manufacturing stage.
5) Employee withholding tax
This refers to the amount of tax that is taken or withheld from the paycheck of an employee. The amount the employer can withhold depends on the amount that is being earned by the employee.
Impact of Inflation on business taxes
The amount of money that is being spent by the government directly influences or impacts economic activity. If the government does not have any money, it has to raise money by borrowing it or raising money through various taxes.
Currently, income tax is collected through individual and corporate tax. The increase in global inflation will increase the burden of this capital on consumers and businesses alike. The impact inflation has depends on factors such as; the asset type, and the period the asset was held before it was sold. An increase in inflation leads to a subsequent increase in taxation on business investment.
There is a positive correlation between the increase in inflation and the increase in taxes. It can be said, an increase in inflation causes an increase in tax revenue that is collected by the government. There are two aspects, which have to be considered to establish a relationship between taxes and inflation.
There are two types of taxes; direct and indirect. Direct taxes have been found to have a lower impact on the tax revenue that is being collected compared to the indirect taxes that are being imposed on consumers and businesses.
Business strategies to deal with inflation
A business cannot control the inflation in the economy, but certain strategies can be adopted to ensure the fact that the impact of inflation is minimal on the business. These strategies include:
1) Price Strategies
The period of inflation can serve as a great time for some reflection on the price of the product that is being offered. An important step before considering whether to increase the prices is to understand the strategies that are being used by the competitors and to act accordingly.
Sometimes, there is no other option but to increase the price of the product due to the current changes in the economy. It is also important to understand how these changes are communicated to the consumers. An effective mode of communication will lead to the retention of a maximum number of customers regardless of the price.
2) Outsourcing the work
Another important factor to consider is the cost of a product or service. The profit margin can be increased or maintained, during the period of inflation, by outsourcing the work. Outsourcing can be in form of technological advancement into the already existing technology. It can also be in form of outsourcing the actual work to third-party agencies.
3) Multiple suppliers
One of the problems that are caused by the increase in inflation for businesses is the distribution in the supply chain. This can lead to not enough buyers getting the product. This issue can be resolved by having multiple suppliers and vendors accommodate the supply of the product to the consumers.
This has become more important after the covid-19 pandemic, which caused a massive supply chain distribution for those who were relying on a few suppliers and vendors. Thus, it can serve as a lesson to learn from, and avoid similar mistakes in the future.
4) Business loans
If getting business loans is on the agenda, it must be paid great importance because the increase in interest rates hampers the ability of businesses and consumers to borrow money. Thus, it is important to secure these loans with lower interest rates. When lower interest based loans are acquired, the repayment of these loans is easier as compared to high interest loans.
5) Managing expenses
An effect of inflation is the overall increase in commodity and material prices. This increase in prices leads to more expenses for the business to manage. It is important to understand ways to reduce these expenses so that the business can stay afloat while managing and maintaining its profit margins.
This can be done effectively by cutting back on unnecessary costs and finding cheaper alternatives to those currently used. Unnecessary spending can be found by doing an overall audit of the cost and various departments and effectively managing those that are unnecessary.
If you need help managing your budgets due to inflation, contact us at Speed Financial Group. Our dedicated team of tax professionals is here to educate you on the various strategies to get the most bang for your buck, minimize taxes, and stabilize your bottom line.
Schedule a consultation today!
Also read “Best Softwares to Use to Keep Records for Your Accounting“
