Over the past few years, many businesses have been relocating or expanding to states with more favorable tax environments. And it makes sense, as such moves can trigger significant cost reductions and strategic positioning, leading to improved operational efficiency and a healthy bottom line.
States such as Texas, Florida, and Tennessee are particularly attractive to many companies. The reason? They don’t levy state income tax, have lower corporate tax rates, and offer robust tax incentive programs.
In this blog, we’ll cover everything you need to know about corporate state tax implications, to equip you with the information you need if you’re considering business expansion or relocation.
The State Tax Landscape for Corporate Relocation and Expansion
Businesses that operate in multiple states will be well aware that state taxes can significantly influence the financial viability of relocation and expansion. After all, each jurisdiction has its own tax rates, incentives, and methods of calculating how taxes are apportioned and allocated. And these factors can change over time.
If you are considering moving to another state, keep the following factors in mind:
- Corporate income tax: Naturally, these are a direct business cost. That means that states with low or no income taxes, like Texas or Nevada, offer your company immediate savings. The same applies to jurisdictions with low tax rates, like North Carolina.
- Sales tax: States levying sales or use taxes can increase your operational costs if you have a retail or distribution-dependent company. But that doesn’t mean you should write off these states! Some offer additional incentives, like exemptions on machinery or inventory, to offset the costs you’ll incur.
- Property tax: Because tax levels vary across states, some areas have higher property taxes. This means it will cost you more to own or lease property in some jurisdictions. However, as with other tax programs, there are abatements or exemptions to help lower this tax burden.
State tax incentives
Tax credits are one of the most common and prolific incentives offered across the country. In fact, most states will have credits available for research and development (R&D) programs, or job creation.
The former often helps offset a portion of your business’ income tax liability. The latter can help lower your payroll costs. For instance, Alabama offers refunds of up to 4% of new payroll costs for 10 years, while Georgia provides $1,250–$4,000 per new job annually based on your company’s location.
Other incentives to consider for your corporate state tax implications are sales and use tax. These perks allow you to reduce the cost of some of the equipment and materials used in your company.
The same is true for property abatements. For instance, Florida offers property tax abatements to companies supporting economically disadvantaged areas, or Opportunity Zones. Because these areas align with broader economic development goals, they can offer substantial savings.
But with all the different tax rates, incentives, and regulations, which states are considered the best ones for corporate relocation and expansion?
Are some states more attractive than others?
While all states have their pros and cons, the below are currently considered among the most popular for businesses.
- Texas: With no state income tax and a strong economy, Texas is a popular option for many businesses. It also features additional incentives like the Texas Enterprise Fund.
- Florida: This state has no individual income tax and low corporate taxes. It also offers incentive programs for businesses in economic zones.
- Nevada: Offering no corporate or individual income tax, and low sales taxes, Nevada is popular because of property tax abatements.
Of course, the right option for your business will depend on your specific needs, as well as your industry.
Key Tax Considerations When Expanding or Relocating to a New State
No matter where your business is located, you’ll likely want to reduce your corporate tax bill. And with that mind, if you are considering expanding or relocating, you need an effective tax strategy.
This should factor in things like the impact of a state’s corporate tax rate, which will directly impact your bottom line. But you’ll also need to consider state-specific tax filing requirements. These vary across jurisdictions, and sometimes that means you may need to submit separate corporate tax returns.
And don’t forget about nexus and the implications of working cross state borders. Many areas are adopting single-factor apportionment based on gross receipts, which means you’ll be affected if your business earns income from a specific state, even though you have no physical presence there.
Structuring your business to minimize tax burdens
Your business entity can have significant federal tax obligations and therefore impact your corporate state tax implications.
For example, pass-through entities like LLCs and S Corporations allow profits to bypass corporate taxation and be taxed at the individual level. However, many states also have specific requirements for pass-through entity taxation (PTET). And if you run a C Corporation, you’ll be subject to double taxation. But on the plus side, these entities have robust liability protection and the option to deduct a broader range of expenses.
Another consideration is whether you own a holding company. These allow you to strategically allocate operations and income across multiple states, to optimize your tax liabilities.
Finally, intercompany agreements and transfer pricing are great ways to manage your taxes if your business has entities in different states. These agreements set the terms for transactions between your companies to ensure compliance and help lower your tax liabilities in higher-tax states.
When it comes to assessing your corporate state tax implications, you’ll need to identify the best incentives for your business model. Your tax strategies should align with your industry, scale, and current and future goals.
Managing multi-state compliance
Because different states have different tax rates, laws, and filing dates, multi-state compliance can be significantly challenging. This means you have the added burden of needing to constantly monitor the tax laws across states, to make sure you don’t miss any updates or changes. Failure to do this means you could face penalties with steep interest charges. While accounting software like NetSuite can be a great help in staying up to date with tax rates, it’s still best to consult a tax professional to double-check check you’re compliant. This could be part of your internal finance team, or you could outsource your taxes to someone to do the heavy lifting for you.
With dedicated professionals keeping an eye on your tax compliance, one of the corporate state tax implications you won’t need to worry about is a potential audit.
For help navigating multi-state corporate taxes and compliance, or to create a tax strategy to make the most of possible benefits, schedule a Discovery Call with one of our tax professionals today!
The information presented in this blog article is provided for informational purposes only. The information does not constitute legal, accounting, tax advice, or other professional services. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability of the information contained herein. Use the information at your own risk. We disclaim all liability for any actions taken or not taken based on the contents of this blog. The use or interpretation of this information is solely at your discretion. For full guidance, consult with qualified professionals in the relevant fields.