Navigate Higher Inflation and Higher Interest Rates

While it’s easy to look at this business climate with a resigned sigh, there are certain strategies available to lessen the negative impacts of rate hikes and inflation.

Inflation
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The business climate of 2022 is one of high inflation and rising interest rates. While everyone can debate causes, effects and lay blame, none of that changes the fact that these are the conditions all of us are forced to reckon with. 

Over the past few months, the Federal Reserve has twice raised rates—a quarter point in March and a half point in May (the half point representing the largest single rate hike in two decades). Most economists and pundits feel this will be ongoing—if you believe the talk, rate hikes are almost certain to continue through 2022 and likely into 2023. These hikes happen slowly, quarter and half points at a time, presumably to upset the apple cart too much.

While it’s easy to look at this business climate with a resigned sigh, there are certain strategies available to lessen the negative impacts of rate hikes and inflation.

If You Do Borrow, Insist on a Fixed Rate

Business and commerce are not stopping, so there will still be many companies who need to borrow money. And if they do, they should insist on nothing but a fixed rate loan.

Getting a fixed rate (meaning the rate never rises or falls for the life of the loan) is usually desirable anytime. Put simply, having a payment that’s stable and predictable is easier to manage and plan for, but this takes on an increased importance in a “rates are rising” business climate. Since the rate pendulum tends to swing very slowly, and we’re likely at the beginning of a rising direction, there is good reason to believe rate increases will continue for some time.

In other words, the rate you are seeing right now is likely the lowest rate you will see for the foreseeable future. If you are looking to borrow over the next year, locking in at a fixed rate is preferred. You’ll simply pay less for your loan today than you will next quarter. Plus, with a fixed rate, you’ll keep paying less.

Section 179 is More Important Than Ever  

Ensuring you take a full Section 179 deduction has never been more important.

For those who don’t know (and it's always surprising how many don’t), Section 179 allows a company to deduct the full price of nearly all business equipment purchased and put into service during the calendar year. In other words, instead of yearly depreciation, a company can deduct the entire cost this year.

There are a lot of good reasons to take a full Section 179 deduction, but the simplest and most straightforward is it amounts to a discount equal to whatever a company’s tax rate is. In other words, if the company’s tax rate is 35 percent, then deducting the full cost of a purchase from said taxes amounts to a 35 percent discount on the price of the item. That’s a healthy discount, especially in an inflationary or high-rate environment.

With Section 179’s total deduction a little north of $1 million, almost every company can benefit by taking as high a deduction as they can for 2022. This also ties into the next tip.

Use TVM to Your Advantage

If you were offered $5,000 in cash right now, or $1,000 a year for five years, which would you take? Almost everyone would take the $5,000 right now. Not only because $5,000 at any time is good, it’s also because that $5,000 right now is worth more than $5,000 later.

That’s largely due to the time value of money (TVM), which contends that money today is always worth more than the same dollar figure in the future.

The reason for that is the number of compounding periods. This virtually guarantees that a $100 bill today is always worth more than that same $100 bill in the future, because today’s $100 bill can theoretically build upon itself via compounding.

Let’s circle back to rates for a second, because they do work both ways. Yes, rates are going up on borrowed money, but at the same time, they also go up for your bank balances. The numbers may be smaller (virtually nobody is earning big numbers on bank balances these days), but every single percentage point still affects the TVM in a positive way, which is always preferable.

This is another good reason to take full advantage of Section 179 instead of yearly depreciation and take the lump sum right now. Even if the raw paid interest increase isn’t earth shaking, it’s still preferable to zero.

Wrapping Up

In a higher-rate and higher-inflation climate, every dollar is important. And while the strategies outlined will not make or break a company, used intelligently, they can help a business better navigate the choppy financial waters we’ll be operating in over the next year or so.   

Bottom line: companies should speak to their tax professionals and utilize every strategy and advantage possible. They are out there, and they can make a positive impact over the next few years. 

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