Matter & Substance
  September 7, 2021

Budgeting in Today’s Climate (Inflation and Taxes and Credits, oh my!)

This year, we are learning to navigate a changing environment full of surprises and challenges – especially when it comes to running your business. As the saying goes, we are not in Kansas anymore. How do you budget for uncertainty, and how can you maximize your cash flow? Join us as we explore new territory and let us see who we meet along the way (hint: it will not be lions, tigers, or bears).


The race against INFLATION

In the face of the pandemic, everything we knew about supply chains, human behaviors, purchasing preferences and society has been disrupted. Additionally, recent weather events have impacted certain industries, such as oil and lumber.

We argue the best way to counteract the uncertainty of inflation is through planning. This includes a clear, realistic budget. Your budget is your roadmap, keeping you on the yellow brick road and out of the red. With the help of realistic financial forecasts and a strict spending plan, you can keep tabs on your operations. Here are a few key considerations to budgeting during a time of inflation:

  1. Identify necessary expenses and highlight ones vulnerable to inflation. These may include shipping, raw material inputs and labor. Explore alternatives before these costs become an issue, and budget for forecasted price increases on items which cannot be replaced. Secure long-term price commitments wherever possible from your suppliers.
  2. Analyze expected impact on demand. If rising costs will have little impact on demand, consider raising prices or structuring a plan to gradually escalate prices.
  3. Implement policies to manage cash flow. Adjust credit terms with customers and shorten your cash conversion cycle.
  4. Invest in technology. If there are areas of your business which would be cheaper in the long run to automate, invest in the technology to do so. Streamline your operations and make the most of your labor force.
  5. Budget by product and business line to track profitability. Consider narrowing your focus to improve overall efficiency or identify areas where you can improve performance.
Hello, TAXES, our old friend 

Inflation is not alone. 2021 brings the prospect of big changes to existing tax law. Such changes, if enacted, may throw a wrench in strategic plans. To get ahead of the changes, look at your financials, meet with your tax advisor, and model out the potential impacts. Here are a few of the highlights of possible legislation and what to pay attention to. The following have been discussed or proposed in legislation, though none have been enacted.

  • 28% corporate tax rate – This would be an increase from the current 21% rate, but still less than the 35% rate of years past.
    What to do: When budgeting, consider accelerating revenue and deferring expenses to recognize income before the rate rises.

  • 21% tax on Global Intangible Low Tax Income (GILTI) – Increase from the current rate of 10%, the tax on GILTI may also see changes in how it is calculated.
    What to do: Perform cost-benefit analyses on foreign operations. Budget for increased taxes, consider relocating domestically or divesting foreign operations.

  • 3.8% Net Investment Income Tax on pass-through income – Previously only applicable to passive investment income, the NIIT may soon apply to active pass-through business income for those earning more then $400K/year.
    What to do: Again, accelerating income to the current year, whenever possible, could minimize the impact of this change. Taking advantage of tax planning strategies (including restructuring) early can help business owners minimize the total income subject to NIIT, leaving as much cash flow as possible for reinvestment in companies.
Let the CREDITS roll 

Payroll is the largest expense for many companies. Finding balance between compensating your team well for their achievements and maintaining enough cash flow to invest in growth can be challenging. Luckily, many of the credits in COVID relief legislation, as well as in proposed legislation, are designed to offset payroll costs with tax credits.

  • Employee Retention Credit – The employee retention credit was extended and can now be applied retroactively. Employers are eligible for a credit for 50% of up to $10,000 in qualified wages paid between March 12 and December 31 of 2020. The credit may also be available for 2021 for many businesses. The 2021 credit can be up to $7,000 per employee per quarter. Qualification is complex and often misunderstood.
  • Credits for Sick and Family Leave – COVID relief packages included numerous credits for those who are sick or on leave due to Coronavirus and the pandemic.  These include credits if employees themselves were sick, needed to care for someone sick, or take care of children due to a daycare of school closure. 
  • Paid Leave Credit for Vaccines – Employers can fully offset the cost of paid leave to receive the COVID vaccine, including time off after to recover. To be eligible, you must have fewer than 500 employees. The credit is capped at $511/day for ten workdays.
  • Work Opportunity Tax Credit – Employers who hire employees after a long-term unemployment – such as veterans, those recently off welfare, or recently out of prison or rehab – are also eligible for a credit. The WOTC is a refundable credit of up to $9,600 per employee who is not eligible for the ERC.
  • Research and Development Credit – When budgeting for future growth and development, be sure to include the impact of this incentive, which offers cash back for a portion of qualifying expenditures. The rules are complex and very specific, making it a good idea to engage a tax professional to assist in taking full advantage of this one. If your company spends time developing new products or processes, we can help you maximize your credit.
What does this mean for you?

There is much to be done to prepare for the impacts of inflation, tax changes, and credits. Do not let the changes on the horizon affect your business and livelihood. Armed with a reasonable and thoughtful budget, you can tackle anything.

No one knows your financial statements like we do – let us help you. Reach out to your M&S Advisor today.