Many small businesses posted a strong year of growth in 2021 as government stimulus, changing lifestyles and improved COVID-19 conditions fueled consumer spending. This trend is expected to continue in 2022 as supply chains begin to unclog, domestic production capacity improves, and continued investment in technology, infrastructure and efficiency produce broad economic gains.

As the industry enters a new year, there’s optimism and excitement, as well as caution about lingering economic uncertainty.

Construction

The U.S. construction industry will continue to benefit from the white-collar economy transitioning to remote work, driving demand for building improvements as well as purchases. A shortage of affordable housing is also driving demand for new residential construction. In addition, new government spending from the infrastructure bill and budget earmarks to encourage energy efficient construction will power additional demand for residential and commercial projects.

Manufacturing

Stretched and unreliable supply chains have forced retailers and wholesalers to look for more dependable manufacturing partners closer to home. This trend will continue in 2022 as domestic manufacturing incentives in the infrastructure bill kick in and as investments in factory automation make U.S. manufacturing more cost competitive in the long run versus lower-cost labor markets overseas. The result will be continued repatriation of manufacturing to the United States and North America overall.

Inflation

The U.S. inflation rate surged in 2021 led by the energy and automotive sectors. Other raw materials also surged during the summer months but then cooled as supply chain issues began to improve. While we expect inflation to remain higher in 2022 than the recent historical average, planned Federal Reserve rate hikes, increased investments in energy production and repairs to the supply chain are expected to combine to cool inflation in the latter half of the year. Lower inflation is generally preferable for small businesses, which struggle to pass on higher costs of goods and labor to their customers without negatively impacting demand.

Supply Chain Normalization

Disruptions in the supply chain are expected to improve but not fully return to normal in 2022. Lead times will come down for many products, especially those with fewer component parts and those manufactures in onshore or nearshore locations. However, labor shortages are expected to persist in 2022, causing strains on manufacturing as well as the trucking and logistics sector. Backlogs in ports and on cargo ships around the world are expected as pent-up demand continues to outstrip the supply of containers, ships and port-space. COVID-19 spikes in China, which does not have mRNA vaccines and has less heard immunity than most western countries, could exacerbate existing problems in the global supply chain.

Tax Rates

A number of tax changes for 2022 were expected to be enacted through the Build Back Better Act which was passed by the House of Representatives on Nov. 19, 2021. However, the bill has been unable to move forward in the Senate as it lacks the support of 50 Democratic Senators and has no Republican support. It remains unclear what, if any, tax changes will be passed this year, and if passed, when these changes would go into effect. However, some of the notable tax changes proposed in the bill are outlined below and, one might expect to eventually see many of these changes enacted once agreement on a new version of the act can be reached.

Proposed business tax changes in the Build Back Better Act passed by the House:

1. A gradual increase in the minimum tax on foreign profits of U.S. corporations from 10% to 12.5% in 2023, 15% in 2024 and 18% after 2024;
2. A 1% tax on stock buy-backs of U.S. public companies;
3. Expansion of the 3.8% Net Investment Income Tax which would now also apply to income from pass-through entities, even if the taxpayer is actively involved in the business;
4. A 30% investment tax credit to manufacturers who retool, expand or build new facilities that make energy-related products;
5. Stronger tax reporting rules for crypto currency exchanges regarding their customers’ earnings; and
6. Notably, a contemplated corporate income tax increase which would have reversed some of the tax cuts in the Tax Cuts and Jobs Act of 2017, was not included in the act passed by the House.

Proposed individual tax changes in the Build Back Better Act:

1. Increases the limit on the deduction for state and local taxes from $10,000 to $80,000, providing a tax reduction for high earners residing in states with high tax rates; and
2. Levies a surcharge of 5% on adjusted gross income that exceeds $10 million and an additional 3% on adjusted gross income above $25 million.

Political polarization has reached an extreme, making bi-partisan legislation extremely difficult. As we enter a mid-term election year, it is hard to see legislation outside of a slimmer version of the Build Back Better Act being passed before a new Congress has been seated in January 2023. In the interim, small businesses should keep an eye on the Federal Reserve to gauge how aggressively it chooses to implement rate hikes as these actions could have a significant impact on consumer prices and economic growth in the coming year.

The small business economy has proven resilient over the last two years of unprecedented turmoil and change. 2022 is expected to bring a welcome sense of normalization as the virus dissipates, inflation weakens and some supply constraints are resolved. However, many uncertainties remain for America’s small businesses and we have no doubt that the coming year will prove as eventful and potentially more opportunistic than those of recent past.