How Inflation Impacts Taxes: Key Insights for Small Business Owners in 2025

The Tax Impacts of Inflation: What Small Business Owners Should Know

Inflation doesn’t just impact the cost of goods and services—it also influences your taxes. For small business owners, understanding how inflation affects deductions, credits, and tax brackets is crucial to managing your finances and staying compliant with tax laws. With annual inflation adjustments, the tax code shifts to account for changes in the purchasing power of the dollar. These changes can either save you money or increase your tax liability, depending on your financial strategy.

In this article, we’ll break down how inflation influences key areas of tax planning and what every small business owner needs to know.

1. Inflation Adjustments and Tax Brackets

One of the most noticeable effects of inflation on taxes is the adjustment of federal income tax brackets. Each year, the IRS reviews and adjusts tax brackets to account for inflation, ensuring that taxpayers aren’t pushed into higher tax brackets due to modest increases in income.

For small business owners who file as individuals or pass-through entities (like LLCs or S-corporations), this is particularly important. In 2025, for example, the IRS increased the income thresholds for each tax bracket by about 5.4% to reflect inflation. This means you may remain in a lower tax bracket even if your business income increases slightly year over year.

What to Do:

Monitor annual IRS announcements regarding inflation adjustments to tax brackets.
If your business income fluctuates, work with a tax advisor to calculate your effective tax rate under the new brackets.
Consider deferring or accelerating income, where appropriate, to stay within a favorable tax bracket.

2. Changes to Standard Deductions

Inflation also affects the standard deduction, which increases each year for inflation. For 2025, the standard deduction for married couples filing jointly rose to $27,700, up from $25,900 in 2022. Similarly, for single filers, the deduction increased to $13,850.

For small business owners, the standard deduction can make a significant impact, especially if you don’t have enough expenses to itemize deductions. Taking the larger deduction helps reduce your taxable income, leaving you with more cash to reinvest in your business.

What to Do:

Compare the standard deduction to your potential itemized deductions annually to see which option benefits you the most.
If you plan to purchase equipment, supplies, or other deductible items, time those expenses strategically to maximize their impact.

3. Inflation and Tax Credits

Many tax credits are also adjusted for inflation, offering small business owners opportunities to save even more. For example:

Earned Income Tax Credit (EITC): If your business income qualifies you for the EITC, the income limits and maximum credit amounts are adjusted for inflation annually.
Child Tax Credit: If you’re a business owner with dependents, inflation adjustments may impact the income thresholds for this credit.

These credits can be a lifeline for small business owners trying to balance business expenses with personal financial obligations.

What to Do:

Review available tax credits annually to ensure you’re taking advantage of any changes.
Work with a tax professional to identify credits specific to your industry or business structure.

4. Business Deductions Impacted by Inflation

In addition to the standard deduction, several business-related deductions are subject to inflation adjustments:

Mileage Deduction: If you use a vehicle for business purposes, the standard mileage rate is adjusted annually. In 2025, the rate increased to 65.5 cents per mile, up from 62.5 cents in 2022.
Section 179 Deduction: The maximum deduction for capital expenditures like equipment or technology increases with inflation. For 2025, the limit rose to $1.16 million, up from $1.08 million in 2022.
Retirement Contribution Limits: Inflation impacts contribution limits for retirement plans like SEP IRAs, SIMPLE IRAs, and 401(k)s. In 2025, the 401(k) contribution limit increased to $23,000.

What to Do:

Track deductible business expenses closely and review any inflation-adjusted limits before filing.
If you’re planning major investments in equipment or vehicles, ensure you understand how these deductions will impact your taxable income.
Consider increasing retirement contributions to reduce taxable income while preparing for your future.

5. Inflation and Capital Gains Taxes

For small business owners who sell assets such as property, equipment, or stock, inflation can affect your capital gains taxes. The IRS adjusts the capital gains tax brackets annually for inflation, which may help reduce the taxes owed on long-term investments.

What to Do:

If you plan to sell a significant asset, consult a tax advisor to determine the most tax-efficient timing for the sale.
Explore opportunities for tax-loss harvesting to offset capital gains with losses.

6. State Tax Implications of Inflation

While federal taxes often adjust for inflation, not all states follow suit. Some states with fixed tax brackets or flat tax rates may not adjust thresholds for inflation, potentially leading to a higher state tax liability over time.

What to Do:

Review your state’s tax laws annually to understand how inflation impacts your overall tax liability.
If you operate in multiple states, work with a tax professional to navigate state-specific rules and adjustments.

How Small Business Owners Can Prepare for Inflation’s Tax Impact

Inflation can be both a challenge and an opportunity for small business owners. While rising costs may eat into your margins, inflation adjustments to deductions, credits, and brackets can provide relief—if you know how to take advantage of them.

Here are some key takeaways to prepare for inflation’s tax impact:

Stay informed about annual IRS inflation adjustments and how they affect your tax obligations.
Work with a tax advisor to optimize your deductions, credits, and income strategies.
Plan your expenses and investments strategically to maximize tax savings.

By staying proactive, you can navigate inflation’s effects on your taxes while keeping your business financially strong.