When your business grows to the point where you can consider expanding into a new state, it’s time to pat yourself on the back. This is a major achievement that speaks to your hard work and success! Before you make your next big business move, it’s best to look at the tax implications of operating in a new state. Here’s a list of what to consider.
Understanding the tax requirements before moving into a new state helps you ensure the expansion decisions will benefit your business in the best way. Small business accounting in multiple states can get complicated quickly, depending on the type of expansion. For example, if the plan is to expand the business’s customer base by hiring a salesperson in another state, this is very different from building or renting an entire warehouse to expand the entire operation. In the first scenario, there are certain income tax withholding rules in the state in which the new salesperson performs their duties. In the second scenario, there are differing tax implications that may affect the size of the business’s expansion and capital requirements.
Some states don’t require withholding tax, and so it may be a strategic move to expand into those states first. Some states have reciprocity agreements, meaning that two states allow its residents to only pay tax on where they live instead of where they work. These agreements are done between the states and are available for the business to use. In all situations, tax laws affect the business’s profit margin. Each state uses their own formula for allocating income tax, so it’s important to delve into how they assess taxes and how it impacts the bottom line.
So how does a state’s formula for allocating income tax impact the business’s profit margin? States use apportionment to allocate the total business income between the states, and states may use different apportionment formulas. For example, some states triple-weight the income and don’t use any other factor in the apportionment. Other states double the income factor, double weight the payroll, and skip anything for property in the state. It can create a variety of answers by state. Regardless of the state, it’s own tax formula will have implications on your business, so structuring your business offering and pricing appropriately for each state will have the best result on your bottom line.
While thinking about expanding into multiple states, there are a lot of decisions involved, such as who to hire, where to expand, what prices to charge, and more. Sometimes it’s best to bring on support from accountants for small businesses who have experience in multi-state tax considerations. They can analyze the different equations for each state and help determine which may make the most sense for your particular business model and for your profit margin.
In addition, state tax rules are known to change on a frequent basis. Working with accountants who are on-top of the inconsistent changes will give you peace of mind to run your business in the way you’d like.
Find the right partner to ensure you’re set up correctly and are making the most out of your expansion into another state. Partner with the multi-state tax experts at Tolbert CPA.