Growth is great when you run a small business. In fact, doing business across multiple states is a good sign. However, it may also draw out a new set of tax issues. Here's a rundown of how small business multi-state tax planning works for some common types of small businesses:
- C corporations must file just one tax return for each state
- Owners of flow-through entities, partnerships, limited liability companies, and S corporations must file tax returns in each of the states where their entities conduct business
- Partnership members must file state tax returns in each state where a partnership has a nexus
There is a small amount of wiggle room regarding how some states allow limited liability companies and partnerships to be taxed. What's more, some S corporations are automatically treated as C corporations because some states do not extend recognition to S corporations. That makes it important for an S corporation to assess its status in every state where a nexus can be proven.
Yes, juggling all of your tax figures when you work in more than one state may get complicated pretty quickly. Still, your tax plan should be both comprehensive and state-specific if you do business in multiple states. Each state generally has its own rules and guidelines regarding who needs to file. In addition, the way your business reports income may vary by state.
Every Multi-State Business Owner Should Understand Nexus
Nexus is one of the most important terms you may come across as you endeavor into small business multi-state tax planning. That's because you will generally be taxed in states where your business has this important thing called nexus. Nexus can be defined as a circumstance by which a business has a tax presence in a state's tax jurisdiction. Nexus encompasses the amount of work, sale, or general activity of a business, and this is where "knowing your stuff" becomes very important because the parameters for nexus might be a bit blurry.
A large number of business owners may assume that they owe taxes in any state where they do any type of work. This isn't necessarily the case. You may not have nexus in a state where you don't own property, possess inventory, employ people, or generate revenue.
Taking Action After Determining Nexus
It may be beneficial to allocate your revenue channels by the state for each state where you have tax nexus. You should try to figure out how much is or isn't owed to each state based on the way states qualify and tax revenue. Opening up a long-term plan for determining nexus is crucial every time you do a business activity of any kind in a new state.
Looking at Your Net Income
You will most likely need to know your company's net income before you can figure out how much of your income each state can actually tax. Again, this is something where the rules vary by state. Most states use what is known as the three-factor formula for taxation. This formula looks at how portions of revenue, property, and payroll expenses are assigned to a specific state to determine how much of your net income can be taxed by that state. States that don't use the three-factor formula may just base your tax obligation on one factor.
Putting an Organized Tax Strategy in Motion
It may be easy to feel overwhelmed by all that goes into small business multi-state strategic tax planning. However, the team here at Fusion CPA is here to help you uncover all of the potential benefits that come from proper, timely tax planning for multi-state businesses. Did you know that some corporations can deduct state taxes paid one year as a business expense the next year? We're here to help you discover these types of tax law intricacies that may ultimately lower your tax burden while keeping you in full compliance with the IRS and state taxing authorities. It may be stress-relieving to confidence about your tax plan if you do business in more than one state. You can learn more about our services by clicking the button below to schedule a complimentary discovery call today!
This blog article is not intended to be the rendering of legal, accounting, tax advice or other professional services. Articles are based on current or proposed tax rules at the time they are written and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to 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.