Inflation Spikes, Tax Chaos, and Credit Woes: Small Business Owners Face Unprecedented Challenges, Experts Offer Advice

There is no denying that the brutal and pervasive economic conditions are wreaking havoc on the U.S. small business community. The Consumer Price Index report released on June 10, 2022, shows inflation spiked by 8.6% in May, the largest 12-month increase since December 1981. Rapidly rising costs have not only squeezed profit margins but disrupted the ability to make accurate business plan projections. The Internal Revenue Service is currently backlogged on processing tax returns, leaving millions of American business owners without their much needed income tax refunds. The confluence of events has also led to credit problems, including owing money to the IRS, and financing hesitancy. It’s tough to approach lenders when pessimism about the future reigns.

It’s no surprise, then, that the National Federation of Independent Business Optimism Index reported that in April 2022, small business owners' optimism is at its lowest level in nearly 50 years. And now the stress these financial concerns are causing has led to serious mental health concerns, as they come right after owners have just struggled through the pandemic.

How can small business owners ride through this latest series of storms? First is to deal with inflation worries, says Dr. David Phelps, an entrepreneur, investor, and author of Inflation: The Silent Retirement Killer. Both the price of conducting business and borrowing money has increased, pushing profit margins down. Making quick, precise, and impactful changes is essential.

“Entrepreneurs now have to do things differently,” says Phelps. “Seek cost-cutting measures. Review your operations budget and determine methods to simplify or digitize the way you deliver products and services. You may need to reduce staff or cut back on employees’ time. Capitalize on your ability to make instant, short-term adjustments that will enable you to keep your doors open.”

Although it’s impossible to know exactly when inflation will slow or reverse course, the general prediction is that economic conditions will smooth and small businesses may see a return to normal sometime in the next six to 12 months. With a few meaningful cash flow modifications, many struggling small businesses can survive until the economic reset.

Phelps expands on this, saying that “this is a time when people need to be careful because in a marketplace where we've had the stock market and real estate generally going up, there are a lot of people out there who will offer to teach others how to make money. It’s like, ‘Jump in here, buy this here, buy my program, come to this, no money down. It's all easy, easy, easy,’ because that’s what people want to hear. But what we have to remember is that we're talking about investing, and investing means planning for long term speculation.” He says this applies equally to investing in assets as well as in your own business.

The tax situation also needs to be navigated, starting with money owed. According to Lawrence Levy, president and CEO of Levy & Associates, Inc., a tax resolution, audit defense, and accounting firm with multiple offices across America, being proactive with these matters is critical. Business owners need to contend with past tax liabilities effectively, and to not ignore communications from the IRS.

“When you get that dreadful letter in the mail that your return has been selected for exams, you absolutely want to seek professional advice,” says Levy. “You never want to go into this alone. You want to have representation by someone who knows what they’re doing.” Levy recommends against relying on accountants for this process because they don’t possess the necessary expertise. A tax professional may even be able to help you pay less than you owe with the best possible offer in compromise.

“You absolutely want to seek professional advice. You never want to go into this alone because there are certain things that the IRS can do and certain things the IRS cannot do, so you want to make sure that you have representation of someone who knows what they're doing. So oftentimes, CPAs, even though they may be the greatest CPA on the planet, they don't specialize in audit defense. You want to make sure you consult with a firm that handles audit defense specifically, which is different than delinquent tax return preparation, or if you owe back taxes. So three things that you want to be focused on; if you haven't filed in a few years, you got to catch up on your filings, if it ends up resulting in a liability, you need to deal with the collection element of it, or if you're being audited, the exam side of the IRS is distinctly different than the collection side of the IRS," Levy explains.

Since the IRS is behind on issuing refunds, you may also have to be assertive with getting money that’s due to you. Keep abreast of the status of your refund by using the IRS’s Where's My Refund tool or the IRS2Go mobile app. Check once a day, as it’s updated every 24 hours.

Handling business obligations and managing credit products well during this time is important. To maintain operations, borrowing funds may be necessary, but be careful and prudent. Identify the loans, lines of credit, and credit cards that have the best terms, and only borrow the amount you truly need.

Creditor payments must be within your means, too. Falling behind will hurt your credit rating, which will then impact financing opportunities. If you’re unable to meet the payments on any of your liabilities, immediately contact the lender before you go delinquent and work out an alternative plan. Many offer hardship arrangements where you can suspend payments for a few months. Upon request, they may even suspect interest and fees.

Last, pay attention to the anxiety you may be feeling, says Dr. Christy Wise, a psychotherapist, coach, and the CEO of Life Sauce. A January 2022 Capital One Business survey found that 47% of business owners are feeling run down and drained of physical and/or emotional energy, and 53% have felt at least some mental exhaustion in the past year due to the stress of running their business.

“This is unlike anything I’ve ever seen,” says Wise. “The amount of depression and health issues is over the top. This is rare. Small business owners have gone through so much. Opening up, closing up, losing trust. Now I’m noticing that people are making choices out of fear. I have one client who is a restaurant owner and he’s serving smaller portions, cutting back on quality ingredients even though he knows it’s hurting his long-term goals.”

Some common mental health warning signs to look out for, says Wise, are an inability to find joy, a lack of appreciation for friends and family members, and drinking or eating too much.

“Sleep issues are huge for small business owners,” says Wise. “Maybe you wake up in the middle of the night, or can’t fall asleep at all, or you always feel exhausted. That can lead to dependency on substances, causing more problems.”

Wise recommends first pursuing support from loved ones, confiding in a partner or reaching out to friends. However, if you are really struggling, connect with a therapist or life coach who specializes in your concerns. Interview a few, and if money is tight ask if they will work with you on a sliding scale.

With the right strategy, support and attention, small business owners can overcome the latest round of challenges. There is cause for optimism, too. The Capital One Business Survey found that, despite recent adversities, most business owners say they are even more motivated to grow their business today.

“Remember why you’re in this,” says Wise. “You started your business because you felt passionate about it. Now lean in. Business owners can grow exponentially now. You’ll get through this. Allow yourself to go all the way and you’ll land in a better place.”