Running a business that operates across state lines demands careful understanding of tax regulations. But, compliance can be a moving target as laws differ between states and often undergo frequent changes too.
In 2024, several key changes to nexus and apportionment rules could impact how your business files its taxes and how much it owes. We delve into some of the latest updates and what they mean for your company.
Pass-Through Entity Taxes and Composite Returns
Pass-through entities, such as partnerships or S corporations, typically “pass” their tax liability to owners, who report this information on their personal tax returns. However, Pass-Through Entity Taxes (PTET) elections allow for businesses to be taxed at the entity level instead. This can have tax advantages, especially in states with high personal income tax rates.
Notable changes that came into effect in 2024:
- Changes to composite returns for non-residents. Composite returns, which allow a pass-through entity to file a single tax return on behalf of its non-resident owners, have become less common in 2024 due to new restrictions. In states like California and New York, once a business opts into PTET, it loses the ability to file a composite return. Instead, each individual owner must file their own tax return, eliminating the previous simplicity of a single filing.
- Residents can opt to be taxed on their total income. With PTET elections residents in states like Colorado, Illinois, New York, and New Jersey can include their federal income, not just the state-specific income into the PTET return. This shift allows residents to potentially receive a larger tax deduction because they are taxed on a broader base of income. For example, in New Jersey, LLCs and partnerships can now remit taxes on 100% of their income under PTET. However, this benefit does not extend to S Corps, which still faces restrictions in this regard.
- State-specific PTET election deadlines. Some states, such as New York, require annual PTET elections. For 2024, the election deadline was March 15. In Michigan, businesses that opted into PTET in 2021 must reelect for 2024, as Michigan has a three-year PTET election cycle. The reelection was due by March 15, 2024,
Apportionment and Nexus Changes
States are increasingly moving toward single-sales factor apportionment, particularly impacting out-of-state businesses. This trend means that taxes are based more heavily on sales rather than property or payroll within the state.
- New Jersey. Partnership receipts sourcing is aligning with C- and S corporations, with single-sales factor weighting and market-based sourcing. This means that customer location and where the sales are made will determine taxable income.
- Idaho. The state has adopted single-sales factor apportionment and market-based sourcing for all types of entities. As such taxes will now be calculated based primarily on where the sales occur. Regardless of where the business’s property or payroll is located.
- Tennessee. Here they are transitioning to a 100% sales factor apportionment. The full implementation is expected to be in effect within two years. This change means that the state will eventually base all tax calculations on sales made in Tennessee, rather than considering property or payroll factors.
- Vermont and New Hampshire. Both states have shifted to single-sales factor apportionment specifically for their business profits tax. This means that the taxable income for businesses in these states will now be determined primarily by their sales within the state. Instead of other factors like property or payroll.
Gross Receipts Nexus Thresholds
Several states have set gross receipts thresholds that determine when a business must file taxes, even if it has no physical location in the state. Notable examples include:
- California: $711,538 annually
- New York: $1,138,000 (2022)
- Ohio: $150,000 for registration in 2023, increasing to a $3 million exclusion in 2024 and $6 million in 2025
- New Jersey: $100,000 or 200 transactions
This means that if a business sells products or services in California, for example, and its sales exceed $711,538 in a year, it must file and pay taxes in California, even if it doesn’t have an office, store, or employees in the state.
These thresholds are not just at the state level. Cities are increasingly adopting their own nexus thresholds, pulling more businesses into their taxing jurisdiction based solely on sales activity.
However, even if your business exceeds the nexus thresholds, in some states you may be protected under Public Law 86-272. This can shield your business from certain tax obligations. But, proving protection under this law requires a deep understanding of each state’s interpretation thereof.
Texas Franchise Tax Update
Most notably, if your business operates in Texas, you will no longer need to file the “no tax due” franchise tax return for federal gross receipts less than $2.5 million. This threshold has been increased from $1.18 million previously, and significantly simplifies the tax process for small and mid-sized businesses.
Given that each state sets its own regulations and thresholds, filing compliant tax returns can be challenging for multi-state businesses to navigate. At Fusion, our CPAs understand the nuances, and can help you optimize your tax strategy and avoid costly penalties. Contact us today!
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This blog article is not intended to be the rendering of legal, accounting, tax advice, or other professional services. We base articles on current or proposed tax rules at the time of writing and do not update older posts for tax rule changes. We expressly disclaim all liability regarding actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.
