As an entrepreneur, nothing is better than reaching the point where you can expand your business. This is an exciting time, and it’s important to make the most of the expansion, especially if the business will be expanding into other states. Because tax filings vary from state to state, it’s easy to get lost in the various requirements. Here we offer eight things every business owner should know about multi-state tax filing, so you make the most of your expansion.
First, every state has its own tax guidelines. So in every state where your business has sales, property, or employees, it’ll be important to understand that state’s specific tax guidelines. By understanding each state’s guidelines and ensuring your business accounting team adheres to them, you’ll be on the track to success.
Next, and this is often a driver in helping companies decide where they wish to do business, in the states you operate, your business faces tax obligations. Since the criteria for taxes varies from state to state, it is crucial to do a thorough analysis of your business’s expansion plans to ensure the states in which you’ll expand are compatible with your business. Although expansion is always good, avoiding major tax implications will impact your bottom line.
There are three types of state tax reporting every business encounters, regardless of the state:
- Annual Reporting: Once you register your business, typically you must file an annual report or a bi-annual report to update that status. Additionally, many states charge a fee based on the business capital of your report.
- Sales Tax Reporting: When you register your business in a state, generally you file your sales tax return even for non-taxable items or services. This helps ensure compliance. For taxable sales and service, you should collect the tax from the customers with each sale and then pay the state when you file your sales tax return.
- Income Tax Reporting: Right now there are only six states that do not have an income tax on net income. State income tax stays at the Federal net income with specific adjustments for each state. You’ll then allocate taxes based on each individual state’s formula.
Being strategic about which states to expand into is important to ensure success. Research the taxes required by each state and consider how you can build the appropriate factor into the pricing of your product or service. Since some states are far more tax-friendly than others, these might be the best states to target for your next launch.
States have different criteria for “doing business,” such as having a state bank account, selling in the state, or even holding meetings. Make sure you understand the criteria for each state to ensure you remain compliant with all your small business accounting.
Taxable items also vary from state to state. In fact, they also change frequently over time. So again, it’s important to understand how this impacts your business’s products and services.
When the business must file for income taxes in a particular state, then owners of the related pass-through entities like partnerships or S Corporations get a state K-1 and file a state income tax return themselves. The ultimate state tax is paid with a 1040 by the owners.
State taxes can get downright confusing, so it’s best to consult with a tax accountant with corporate experience to explain the differences. Accountants for small businesses with experience in multi-state expansions can make sure you not only adhere to the guidelines but also make the most of your expansion plan.
They can help you set up so your data is useful and ensure your expansion decisions align with your goals. Your small business CPA can help you make smart decisions upfront based on the state tax laws.
If you’re thinking about expanding your business into other states and are looking for a partner, work with Tolbert CPA LLC and schedule a consultation today here