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What would you be willing to do to make your business more tax efficient? Would you consider moving to a new city? What about a new state? You may think that relocating is a drastic measure, but it also might be exactly what you need to transform your business into the money machine you have always dreamed of.
Taxes not only have power over your immediate business decisions, they have the ability to impact the long-term health of your company. Because the fact of the matter is that taxes eat away your profits. And depending on where your business operates, taxes could be taking an even more massive bite out of your earnings.
Did you know that California imposes a hefty corporate income tax of 8.84%? Did you know that if you are based out of Philadelphia, then you are subject to a staggering 9.99% corporate income tax rate? Compare that to Washington or Texas, both of which impose a 0% tax rate.
What are the taxes in your state? How much is your business paying each year? How much could you be saving if you relocated?
Just last year, Toyota moved its national headquarters — along with thousands of jobs — from California to Texas. Why did Toyota walk? Because after state and local taxes are factored in, the company realized it could save millions and millions every year by making one single move.
Burger King is another example of a company that took control of its fate when it merged with Tim Horton’s, a Canadian restaurant chain, and effectively became a Canadian company. One of the biggest benefits of this move? As a Canadian enterprise, Burger King will be avoiding the all-around higher U.S. corporate tax rates in the United States.
Granted, you may not own a company the size of Toyota or Burger King, but the message is still the same — state taxes matter, and it is up to you to determine how much you are willing to tolerate.
At the end of the day, all businesses know, to some degree, the drag of taxes, but few truly realize just how much that degree can vary depending on where you live. To help you assess the bite that your state’s tax structure is taking out of your business, you must consider these following factors:
Individual income tax
Did you know that state income tax rate impacts your business in a big way?
Over the past several decades, the number of sole proprietorships, partnerships, S corporations and limited liability companies has skyrocketed. Because these types of small businesses are not subject to an entity level tax, profits are typically taxed at the individual owner’s level. And when you, the small business owner, pay higher taxes on your earnings, you have less money to put back into your company. Need to hire more employees? How about purchase a new piece of equipment? What about that exciting marketing campaign you wanted to run? It all becomes a lot more difficult when more money goes to the tax man.
And it doesn’t stop there. Individual income tax also impacts the overall cost of employment. If you want high quality employees you can expect to pay a higher salary — just how high may depend on what state you live in.
To see just how much states can vary, consider a company based in Oregon versus a company based in Washington. With Oregon’s 9.90% individual income tax and Washington’s 0% tax, it makes you wonder how much more the company north of the border is saving. Or compare California’s 13.3% individual income tax with Nevada’s 0% rate. Would you consider relocating if it meant significant savings?
The bottom line is that individual income tax has profound implications for your small business. How does your state measure up?
Corporate income tax
Though nearly every state levies some sort of corporate income tax, the rate varies drastically depending where your business is located.
There are some states, like Wyoming and Nevada, that skip the corporate income tax altogether. That can mean massive savings when compared to states like Iowa with its whopping 12% corporate tax rate, Pennsylvania with its 9.99%, or even California which imposes a 8.84% rate on businesses.
So should you only consider states with no or low corporate income tax rates? Not entirely. There are some states that may not impose a corporate income tax at all, but do implement gross receipts taxes, which can be just as potent. So business beware, look for corporate taxes in disguise, such as Ohio’s Commercial Activities Tax (CAT), Texas’s Margin Tax or Washington’s Business and Occupation (B&O) tax. The only states that do not impose a corporate income tax or any gross receipts tax are Nevada, South Dakota and Wyoming.
Property tax
Property taxes can be some of the most aggravating taxes for small business owners. And it’s not too hard to see why.
Are you purchasing commercial property? Then you must assess what your state’s property tax structure looks like. Commercial property tends to be taxed at higher rates than comparable residential property, so be sure to know exactly how much property tax will increase your cost.
Higher property taxes also mean your employees will be paying more for their homes. For some homeowners, their property tax bill may even exceed what they owe in federal and state income taxes. Talk about an unseen household expense!
Because property taxes don’t just vary state to state, by county to county, there’s not one clear answer here. Your business could be located in an area with relatively affordable property taxes, while your employees find that the safest area to live that is close enough to work may have exorbitant property taxes.
When this is the case, employers will often supplement the cost of property tax with higher wages. But again, this can be especially problematic in areas with skyrocketing property values.
Do you know what your state and county’s property tax system looks like? Where do most of your employees live and how much do they spend on property tax?
Consider how your state’s property tax could potentially set you back, especially if you’re choosing a location for the long haul. No matter what the direct effect is, the ultimate tax burden may come right back to you.
Sales tax
When it comes to your business, another factor to take into consideration is your state’s sales tax. Own a brick and mortar office? Then pay extra close attention.
Sales tax can be as much as 10% in some states. Granted, your local competition will be subject to the same rates, but what about your online competition? What tax rates do they charge their, and potentially, your customers?
For a while, online retailers were exempt from having to charge their customers sales tax. Can you imagine the competitive price advantage this gave these businesses over their brick and mortar counterparts? But over the past several years, some state have made the push to collect tax on Internet purchases.
So what are your state’s sales taxes? And what is your state’s policy on your online competition? How your state treats brick and mortar businesses and their online counterparts could make or break your business.
Whether you’re an entrepreneur just starting out or a seasoned business owner looking to keep your edge, the fact of the matter is that you made a decision to get in the game, and now, you need to learn how to stay in it — for the long run! And part of learning how to let your business not just survive, but truly thrive, is adopting tax efficient policies that save you and your employees money.
How much does your state cost your business? How does that measure up against the benefits of basing your company there?
Can you answer these questions? If not, do you research and choose a location that fits your business’s individual needs and goals. Where you base your business may just be the deciding factor in your company’s short-term and perhaps, your company’s long-term health.