As a business owner, it is important to stay up to date on the latest ballot measures that could affect your taxes. Keeping informed of these measures can help you better prepare for future tax changes and maintain a healthy financial plan. Recent ballot measures that may affect business taxes have been proposed in various states across the country, so it is important to understand what might be in store for your business.
Big Changes to Federal Business Income Taxes
Some of the largest ballot measures and legislative changes that may affect business taxes stem from the 2022 Inflation Reduction Act (IRA) and the expiration of certain provisions in the 2017 Tax Cuts & Jobs Act (TCJA).
The TCJA also allowed for full capital expensing for businesses from 2017 to 2022. On January 1st, 2023, that deduction was decreased by 20% and will continue to decrease gradually until 2027.
Income tax brackets have been adjusted for inflation for the tax year 2023. For more information, check out our recent article on the topic.
These changes are placing heavier burdens on businesses in the 2023 tax year. But, many state-level initiatives are being implemented as well. These things will aim to even things out and help businesses counteract their heavier federal tax responsibilities.
State Changes That May Affect Business Taxes
Before we start here, we want to make it clear that this article is not an exhaustive list of every state’s tax code changes for 2023, and we also want to remind taxpayers that there are likely to be more changes to your state’s tax code before the year is up.
It’s important to stay up to date on current tax initiatives and legislation. You can do this by regularly checking the IRS website and your state government websites, or you can reach out to a trusted tax professional throughout the year.
With that said, here are some of the biggest tax changes we’ve found that will affect certain states and businesses within them in 2023.
Corporate income tax rates fell in the following states at the beginning of 2023: Arkansas, Nebraska, New Hampshire, and Pennsylvania.
New Hampshire taxpayers will see the corporate tax fall in the form of their Business Profits Tax which falls to 7.5% for the tax year 2023. The state will also see a 1% drop (4% is the rate for 2023) in its interest and dividends tax, part of a phase-out plan that will be completed in 2027. This will make New Hampshire a no-income-tax state at that time.
Individual income tax cuts started on January 1st in Arizona, Idaho, Indiana, Iowa, Kentucky, Mississippi, Missouri, Nebraska, New Hampshire, New York, North Carolina, and South Carolina.
In Washington, D.C., employers of tipped workers were previously allowed a credit against tipped wages received by their employees to satisfy the minimum wage. Now, the Tip Credit Elimination Act has passed. This gradually eliminates this tip credit and increases the minimum wage steadily until 2027. At that time, the mandatory minimum wage for tipped and non-tipped workers will be the same.
Louisiana and North Carolina have reduced capital stock tax burdens.
Gas taxes are increasing this year in the following states: Connecticut, Florida, Illinois, Michigan, New York, North Carolina, and Utah.
Alaska will see a 2023 increase in tax liability related to production tax (also known as the severance tax on the extraction of oil and natural gas. Any fields that began production prior to 2017 can no longer claim a 20% or 30% gross value reduction.
Several states saw changes to their Earned Income Tax Credit. Some increased and others (like Hawaii’s) EITC will be 100% refundable starting in 2023. Many of these changes are a result of efforts to mitigate common small business tax problems.
Iowa’s three-bracket corporate income tax will be combined to create a two-bracket tax, with the highest rate dropping 1.4% to stand at 8.4% for 2023.
North Carolina is simplifying their franchise tax in a way that will reduce the tax liability for many businesses. Moving forward they will only have to remit franchise taxes based on their net worth as defined by the state.
Oklahoma is the first state in the country to make a 100% bonus depreciation allowance permanent, starting in 2023. This allowance is for qualifying machinery and equipment investments.
In Washington, taxpayers will see an increase in the maximum Business & Occupation (B&O) tax credit for small businesses. They’ll also see qualifying transfers of real property to be used for low-income housing exempted from REET, the real estate excise tax.
For state-specific changes to both individual and business taxes, check out this extensive list from the Tax Foundation.
Potential 2023 State and Federal Changes
There are several states that are looking to create tax relief in the same areas that are being phased out or temporarily used in the federal tax code.
For example, Tennessee and Oklahoma both passed legislation that offers deductions for R&D costs and capital expenses related to these programs. Many industry experts believe more states will follow suit in 2023.
Wisconsin is currently sporting one of the highest income tax rates in its region. We will likely see cuts to this rate in a bid to keep small businesses flourishing and to make their rates more competitive with neighboring states.
Make 2023 the Year You Stopped Dreading Doing Your Business Taxes
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