Each new tax year, business owners wonder what’s changed and how they might make the most of their deductions to reduce their tax burden. There are some important changes with business taxes in 2023 that you must be aware of going forward.
Many of the tax credits businesses enjoyed in years past are being phased out starting at the end of the 2022 tax year. Going forward, corporations may pay more in taxes. However, the changes also impact small business owners or those who run a side hustle.
Are Tax Rates Changing in 2023?
Kiplinger recently reported that the seven tax rates that applied to 2022 also apply to 2023 and are 10%, 12%, 22%, 24%, 32%, 35% and 37%. However, what does change is the brackets, so your income tax may be affected if you fall in certain ranges.
If you file as a sole proprietor, your taxes are impacted by any other household income you receive, even if you have a side gig. If you file as a corporation, you may pay more in taxes as the percentages increase. Here are some things you should be aware of as a business owner.
What’s Changed With Business Taxes in 2023
1. Inflation Impacts Tax Brackets
The tax rate brackets change from year to year, depending upon inflation rates. The beginning and ending dollar amounts for each bracket changes. For example, the 22% bracket for a single filer is between $41,776 and $89,075 for 2022 and hops up to $44,726 to $95,375 for 2023.
What does that mean for small business owners? Let’s say you run an online clothing shop and make approximately $40,000 a year. Your spouse works for an employer and brings home $60,000 a year. You just went over the 22% tax rate and are now going to pay 24% unless you have a lot of expenses or other legitimate deductions.
2. Valuations Must Be Based on Fair Market Value
If you’re thinking about selling your company or publicly trading stocks, you must have an outside valuation of your company for your own protection. You can only claim fair market value when preparing to file for taxes. The tax code is extremely complex and difficult to understand even for experienced tax professionals.
Although they’ve not yet been hired, the United States Senate approved additional IRS funding for “enforcement.” Make sure you keep a solid paper trail, consult with tax professionals and make sure you’re taking IRS code seriously as you could be subject to an audit.
3. Corporate Tax Rates Increase
If your business files as a corporation, then you should be aware that the previous 19% corporate tax rate increases to 25% in 2023. For businesses with a slim profit margin, the increase in tax burden will hurt. Make sure you plan accordingly.
You may find it’s better to invest some of the money back into your business or donate to a charity of your choice. Just make sure you consult with your CPA to figure out what will reduce your burden and is allowable.
4. Gradual Phaseout of 100% Bonus Depreciation
One thing business owners should understand is the gradual phaseout of the 100% depreciation deduction many rely upon to reduce their burden at the end of the year and upgrade equipment and machines. By 2023, qualifying purchases get an 80% bonus deduction and then go lower in subsequent years.
You’ll still get to depreciate qualified items over a five-year period, but you won’t have a reduction in tax burden in a particularly profitable year. Businesses should plan ahead accordingly as their tax burden will be higher in 2023 and beyond with fewer deductions available.
Consult With an Expert
Whether you file as a corporation or you are a sole proprietor, understanding how the changes in tax code impact you from year to year is a vital part of making sure you only pay what’s fair. No one wants to pay more in taxes than they have to. Take the steps today to protect your business from an unfair burden in 2023.
Ciao,
Miss Kemya
