How to leverage the new 2023 tax laws to your advantage so you don’t owe the IRS

As we find ourselves in the middle of 2023, small business owners like yourself face a tax landscape that has seen its fair share of changes and updates. Staying informed about all of these changes is essential to ensuring your business’s financial health and avoiding overpaying when tax season comes around.

In this month’s blog post, we’ll explore the noteworthy tax law changes that have occurred this year and how they may impact you as a small business owner. Here’s a snapshot of some significant updates:

  1. Tax Bracket Adjustments
  2. Business Structure Considerations- deductions and credits
  3. Maximize deductions and credits
  4. Retirement Planning

Tax Bracket Adjustments

One of the greatest tax changes that has taken place in 2023 is the adjustment of tax brackets and their rates. These changes will affect how much you owe the IRS based on your income, therefore it is crucial to understand where your income falls within these new brackets to plan your tax strategy accordingly. 

The rates for the 2022-2023 season include: 

  • 35% for incomes over $231,250 ($462,500 for married couples filing jointly)
  • 32% for incomes over $182,100 ($364,200 for married couples filing jointly)
  • 24% for incomes over $95,375 ($190,750 for married couples filing jointly)
  • 22% for incomes over $44,725 ($89,450 for married couples filing jointly)
  • 12% for incomes over $11,000 ($22,000 for married couples filing jointly)

Knowing these amounts and the other 2023 tax laws will help you determine whether you should increase or decrease your withholding or estimated tax payments to avoid underpayment penalties. Keep in mind that your filing status and estimated taxable income (which includes wages) will determine which bracket you’re in. 

As mentioned on the IRS website, here are the greatest changes to tax brackets that you should be aware of:

  • The standard deduction for married couples filing jointly for tax year 2023 rises to $27,700 up $1,800 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $13,850 for 2023, up $900, and for heads of households, the standard deduction will be $20,800 for tax year 2023, up $1,400 from the amount for tax year 2022.
  • Marginal Rates: For tax year 2023, the top tax rate remains 37% for individual single taxpayers with incomes greater than $578,125 ($693,750 for married couples filing jointly).

Business Structure 

Another important aspect of tax laws that you should keep in mind for your business’ success and cash flow, is to determine the most effective business structure. The choice of business structure plays a pivotal role in your tax liability and this year’s changes may require you to reevaluate your options. 

While the 2023 tax laws haven’t changed all that much, it’s still a good idea to consult with a tax professional to ensure your current structure is ultimately the best option for your financial goals. 

This is especially true if your income level changes or if you believe your ownership structure in your company should be shifted. Tax professionals can help you determine if you should remain a sole proprietorship, partnership, S corporation, or C corporation.

Maximize Deductions and Credits

One of the easiest ways to reduce the amount of money you owe to the IRS is to maximize your deductions and credits. Here are some fantastic strategies you could consider:

  1. Depreciation: Take advantage of the updated depreciation rules, such as bonus depreciation and Section 179 expensing to write off the cost of business assets more quickly
  2. Research & Development credits: If your business engages in research and development activities, explore the possibility of claiming the R&D tax credit.
  3. Employee Benefits: Offering employee benefits like health insurance and retirement plans not only attracts talent but can also provide tax benefits for your business
  4. Home Office Deductions: Don’t forget that if you work from home, make sure to claim the home office dedication if you meet the eligibility criteria 

Organization is key when it comes to deductions. It’s essential to be extremely organized and have your bookkeeping in order so that you can claim all eligible deductions and credits while staying compliant with all IRS Requirements. The more organized you are, the better and less money you will have to pay in taxes.

The best way to stay organized with your finances and not have to stress about all of your bookkeeping is by using a tax professional or using a bookkeeping app.

Retirement Planning

Another way to leverage tax laws and save tax dollars is by proper retirement planning. The changes in 2023 tax laws and contribution limits for retirement plans can significantly affect your tax liability. Be sure to review all updated limits and asses whether you should adjust your retirement contributions accordingly. Keep in mind that contributing more to your retirement accounts not only secures your financial future but can also lower your taxable income.

The contributions amounts depend on the type of retirement fund and your income status, so it’s crucial to determine which category your rate falls into.

Here are the types of retirement plans and their contribution limits as of 2023:

  1. 401(k) and 403(b)
    • The annual contribution limit for employees is $22,500
    • Individuals aged 50 and older could make catch-up contributions of an additional $7,500, for a total of $30,000
  2. Traditional and Roth IRAs
    • The annual contribution limit for both Traditional and Roth IRAs is $6,500
    • Individuals aged 50 and older could make catch-up contributions of an additional $1,000 for a total of $7,500
  3. SEP IRAs (Simplified Employee Pension)
    • The annual contribution limit for this year is the lesser of 25% of an employee’s compensation or $66,000
  4. SIMPLE IRAs (Savings Incentive Match Plan for Employees)
    • The annual contribution limit for employees is $15,500

Conclusion

The tax landscape this year has had several notable changes that could impact your business and cash flow. From tax bracket adjustments and your business structure to new deductions and credits, staying informed and proactive is key to managing your tax liability effectively while meeting the IRS requirements and saving as much money as possible.

Don’t forget that tax planning is a year-round effort and seeking professional guidance is one of the best ways to make informed decisions about what will benefit you and your business’s financial health while keeping you in compliance with the ever-evolving tax laws. Also, be sure to stay tuned for our upcoming (free!) blog posts that will be packed with useful information and tips that will help you save your hard-earned money instead of overpaying to the IRS.

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