What you need to know about price hikes and tax strategy

Consumers and business owners in the U.S. enjoyed nearly 0% interest rates and low inflation for over a decade before 2023.

Alas, those days are gone, and many business owners find themselves having to raise prices in response to the current economic conditions.

There’s a lot to think about when raising prices, especially the tax consequences. So, today’s post will cover how to approach price hikes and taxes strategically.

Let’s go!

Revenue Growth and Tax Bracket Management

Price hikes always bring the possibility of moving into a higher tax bracket, especially if your business entity is an LLC, sole proprietorship, or S corporation.

One of the biggest ones to watch is the leap from the 24% to 32% tax bracket.

If your projected 2025 income from a price hike raises your income to over $197,300 (single) or $394,600 (married filing jointly), a significant tax increase could be at hand.

That covers the worst-case scenario, but there are other bracket changes to consider, so be sure to check them out.

If you find yourself potentially moving into a higher tax bracket, there are a few ways to mitigate it.

Timing Revenue Recognition

If your business uses the accrual accounting method, timing when revenue hits your books may help. It takes some careful planning with your CPA, but you may be able to place some revenue in 2024 or 2026 to offset 2025 income.

Admittedly, that method is limited, so let’s look at some others.

Tax Deductions and Credits

Here’s where some real flexibility occurs.

Higher revenue means the opportunity for more investment in equipment, technology, and marketing.

That means lowering your overall tax burden, but you have to plan strategically. There are too many variables to list here, but simply going out and making capital expenditures or increasing operational costs to lower taxes is a fast way to lose money.

It’s important to weigh whether you can afford to maintain new equipment, how you plan to use depreciation, and even which programs will be around in the future.

For example, if you’ve gotten used to using the Qualified Business Income Deduction, then it’s important to know that it may sunset after 2025 without action from Congress.

Other potential deductions, like Section 179 or the Work Opportunity Tax Credit covered in last week’s post (editors’ note: please link to Dec. 3 post), present opportunities if you buy new equipment or increase your labor force.

Bonus depreciation may be another opportunity for capital expenditures made in 2025. Like the QBID, though, this one is on a sliding scale and will be worth nothing by 2027.

There are plenty of things to consider at the federal level, but don’t forget about the local taxes.

State and Local Tax Considerations

If you do business in a jurisdiction collecting sales tax, don’t forget to account for them. The trick here is to stay compliant.

So, review all state and local tax laws, especially if you are operating in multiple jurisdictions.

Also, be aware of State and Local Tax (SALT) deduction limits. If you operate in a high-tax state, the SALT deduction cap is $10,000. That may have been a boon for your business in years past.

However, it can become less helpful when revenue increases due to price hikes.

The Bottom Line

There’s a lot to be concerned about when inflation forces you to raise prices. But ensure that tax strategy and awareness aren’t pushed to the bottom of that list. Take time to consult with your CPA so that your price hikes work seamlessly with your tax strategy.

Then, you’ll have one less (big) thing to worry about!