Tax Proposals, Softening Inflation, Startups/Businesses Feeling the Pinch

[Gene Marks, host]

Hey, everybody, this is Gene Marks, and welcome to this week's episode of the Paychex THRIVE Week in Review episode. I am so happy that you are joining me today. As you know, this is a weekly podcast that takes like a couple of things in the news that impact you and other small business owners, how they impact you as well as some of my thoughts. So, hey, let's get right to it, shall we?

Last week, the Tax Foundation did a very, very deep report. The Tax Foundation — that’s TaxFoundation.org — are a non-partisan, group organization that looks at all things taxes that impact both businesses and individuals, both the federal and state level. And they looked at this new bill that the House Republicans have proposed; actually, three new tax bills — the American Families and Jobs Act, the Tax Cuts and Jobs Act, and also another bill about research and development that’s called the Build It in America Act.

So, these are three acts, pieces of legislation that were released that were initiated in the House of Representatives. They're going through committees right now. They have not been passed by the House of Representatives. They may very well be passed by the House of Representatives, but there's very little chance that they will be passed by the Senate.

It sets the stages, guys, because the tax wars are beginning and I'm going to be writing about this in the media place. I'm going to be talking about it a lot here on the Week in Review and we are going to be having guests on our Paychex THRIVE podcast that that can give us more insights into some of the debates over taxes that we're going to be seeing over the next year and a half, two years leading up to the election, because a lot of the things on the 2017 Tax Act are expiring in 2025.

Already, some things are going away, like expensing research and development expenses and expensing 100% of fixed asset acquisitions in the first year — called bonus depreciation. There's also things that are expiring that are very important, like the qualified business income tax deduction, which is a pass through deduction for small businesses.

Well, these three acts that the House GOP are creating through here wants to extend or even make permanent some of those deductions. They want to turn back some of the green energy tax credits to help pay for this kind of stuff, and there's going to be more. There's going to be more. So, I'm not going to go into detail about these tax acts right now and the reason why is because, like I said earlier, I don't think it's going to affect us very much. It's just going to set the stage.

So, as business owners, we need to be prepared to think about taxes over the next year and a half because it has a big impact on our businesses. We are going to need to be prepared to evaluate and consider the candidates that either favor repealing, extending, making permanent some of these tax deductions or credits, as well as how they will impact our businesses and how they're going to impact the country, as well.

Obviously, people have one state of mind that less taxes spurs investment in business growth. Other people feel that, you know, taxes themselves should be where they are so they can further other programs that are important to the government and may be important to you, as well.

So, the takeaway is this. We've had these new bills introduced into legislation by the House of Representatives this week. We're going to be hearing a lot more about taxes over the coming months. Just be prepared. That's number one.

Number two has to do with inflation. Just last week, we got new inflation data: The Consumer Price Index is now at around 4% — it's less than half the level that it was a year and a half ago — and the Producer Price Index, more importantly, is now at a rate of around 1.1%, which is really great news.

However, when I speak to a lot of business groups, and I spoke to a few of them in just this past week about the Producer Price Index — you remember, that's the price of wholesale goods. This is the price of core materials and labor and other things that businesses spend their money on to manufacture products. It is a leading indicator of inflation.

When I see those prices coming down, that's good news for all of us going forward because, you know, inflation. That leads me to believe that inflation itself can continue to soften. That puts aside any fiscal or monetary effects that are having, you know, boosting up inflation right now, excess money supply.

But the Producer Price Index itself, even though it has come down quite a bit, I just want to warn you, I've been speaking to groups in the construction industry, distribution industry. I spoke to manufacturers. I speak to two large groups of CPAs in both New Jersey and Minnesota in the past week, and you know, most businesses, their clients, they are not seeing a 1.1% increase in their core materials and labor and other costs.

Most businesses around the country are still struggling with double-digit increases in these products that they have been experiencing over the past two years. So, when you're buying electrical components, vacuum tubes, pumps. When you're paying for labor, when you're paying for shipping, when you're paying for utilities, the good news is, is that these prices are on the downswing. They're still increasing but increasing at a lower rate. But for most businesses, they are still grappling with more than double-digit level prices than what they saw as recently as May of 2021.

So, never forget that many businesses and including yours, I'm sure you're seeing the same thing, are trying to deal with this increase in inflation by taking certain steps to control their costs — and there are many things that can be done and it's another topic for another THRIVE podcast. I just want you to be aware of that. You know, we're not out of the woods yet, and because there is still quite an excess in our M2 money supply out there, there is still, you know, supply chain challenges, and many businesses are still grappling with higher prices.

Just be aware that inflation continues to be an issue with a lot of businesses, which is why the Fed decided not to decrease interest rates, and in fact, Fed Chairman Jerome Powell said that, you know, there was no plan on decreasing interest rates probably for the next year or two.

So, we're looking at a prime rate right now at about 8.5%, and if you're looking to borrow money, that's like, you know, you're probably paying 10, 11, even 12% in some cases for working capital, for equipment, for property loans, as well. So, these are all a big burden on a lot of businesses, both big and small, and all of it is being driven by inflation.

Next, and finally, the Wall Street Journal had a great article just this past week about startups and how more and more startups are throwing in the towel because they're unable to raise money for their ideas.

You know, we talked about interest rates. Well, here's a big impact of interest rates. According to one general manager of a venture capital firm, he said the mass extinction event for startups is under way. Back in the day, well, as recently as two years ago, interest rates were like near zero. Borrowing money was like almost free. So, raising money for startups were really not a big deal.

But now the cost of capital has increased significantly and the level of venture capital activity continues to decline and decline and decline. So, this is not just for those tech startups in Silicon Valley that are really hungry and desperate for money, but startups around the country looking to get investor money. Well, investors are now becoming a lot more picky and chooser because their costs have gone up a lot.

For startups that are looking to get funding not just from traditional banks but other sources? Like I said earlier, when the banks’ prime rate is now 8.5%, those funding opportunities have become less and less. Banks are being very careful about who they're lending their money out, particularly to startups if they're not assured of their startups are going to pay their money back.

So, it's not a great time to raise capital, but it's not the end of the world. If your idea is solid, if you have a good business plan, if you can show a good forecast, and most importantly, if you can show an investor or banker a return on investment for the capital they're going to put into your business and assure that they're going to get their money out of your business and then some, well, then even at a higher cost of capital, it might still very well be worth it. So, don't get too discouraged, but just be aware the market out there for startups is very, very tough.

My name is Gene Marks and you've been listening to the Week in Review, at Paychex THRIVE podcast. That's the news from this week and some of my thoughts on it. If you have any suggestions or ideas or would like to see or even suggest a guest, please visit us at payx.me/thrivetopics and tune in to our weekly podcast where I interview guests that impact your business.

Thanks for listening. I will see you again next week with a few items in the news that have an effect on your business and some thoughts on those items. You take care.

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