Moving to a “tax-free” state? Not so fast! There could be taxes you didn’t expect for business owners.
I recently had a new consultation and in reviewing his information he provided, I saw that he had happily moved to a “tax free” state to avoid tax. And, yes, he’s right. He escaped state INCOME tax in his new home. But, when I asked to see a copy of his state business return, there was dead silence.
He thought, as many do, that “tax free” meant just that,NO tax. In most cases, it means no income tax and even that isn’t true across the board. In today’s blog, we’re going to look at “tax-free” states that assess a state income tax.
Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming have no personal income tax for residents. Additionally, New Hampshire and Tennessee do not tax salaries, only passive and portfolio income. Note that this is personal income tax only. There still can be business tax.
Currently 6 states do not have a corporate income tax. These are Nevada, Ohio, South Dakota, Texas, Washington and Wyoming. However, 4 of these DO have some form of gross receipts tax on corporations. These are Nevada, South Dakota, Texas, Washington and Wyoming. So you’re not truly tax free with respect to your business with these.
Another “gotcha” that can confuse people who move for better tax rates is how their business structure is handled in the new state. Usually and especially if you work in your business, your business structure nexus (location) changes when you move. So, if you start out with an Arizona S Corporation and move to Nevada, you’ll want to move to a Nevada S Corporation. In this particular case, there is a tax benefit to the move. If instead you live in Nevada and have an S Corporation with Arizona nexus, you’ll still have to pay Arizona state income tax on income from that business.
Move it to Nevada, and as long as you’re under the gross receipts threshold, you won’t pay tax.
Most state automatically accept the federal S Corporation election. However a few states require additional filings. Arkansas, New Jersey and New York all require a separate state election for the S Corporation at the state level. Miss this and you’ll have a federal S Corporation and a state C Corporation. Talk about a tax and accounting nightmare! Georgia requires specific consent from all shareholders who are not residents of Georgia in order to have an S Corporation in the state.
Some states and local jurisdictions don’t recognize S Corporations at all. They don’t extend the pass-through tax advantages to them because, in their eyes, they are still C Corporations. These areas include the District of Columbia, New Hampshire, Tennessee, New York City and Texas. Similarly, Louisiana taxes S Corporations as C Corporations, but in this case they do allow resident Louisiana shareholders to take an exclusion on the part of income that flows through from the S Corporation.
And don’t forget the privilege and excise taxes that may be applicable to your business! Alabama imposes a business privilege tax based on the S Corporation’s new WORTH. Note that. It’s not income, but WORTH. Yikes!
California, the state I love to hate, requires S Corporations to pay the greater of $800 minimum tax or 1.5% on income. This is over and above the income that is reported as flow through income on your personal return. Yikes!
Illinois has a 1.5% personal property tax on S Corporations.
Ohio has a 0.26% commercial activity tax (CAT) on annual gross receipts.
Rhode Island has a franchise tax based on capital, with a minimum of $500.
Pennsylvania S Corporations are subject to a capital stock tax based on capital stock value.
Washington taxes all businesses a business and occupation tax (B & O tax).
This is all in addition to the tax consequences from flow through entities on the personal tax return of the S Corporation shareholders. In states that have personal income tax, there will be state tax. And, of course, there is no escaping the federal tax.
Business structure selection and location can be tricky. For that matter, so is being geographically independent. If you choose to put down roots for your business, one of the considerations should be the taxes in that area.
All the taxes.
Talk to a qualified tax consultant in the planning stage before you make a big move.
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