Where you do business says a lot about your company. If you’re a clothing shop in Waikiki, you probably have to keep your bikinis and boardshorts stocked all year round. If you’re a therapist in New England you might find your busy season ramps up in November due to seasonal depression. But no matter what you do where you do it affects how you file your taxes.
Business Tax Filing Based on Your State Turf
In addition to your business’s federal filing responsibilities with the IRS, you will also file certain forms based on the states your business is registered or incorporated in, as well as any state your business has sales, property, employees, or facilities in.
Here’s a rundown of tax responsibilities that vary by state for both businesses and individuals:
- Income Tax: Every individual taxpayer already knows about filing federal and state income taxes each year, which vary based on the state you live in. But corporations, which are taxed as separate entities from their shareholders, have even more distinct rules based on the state they are incorporated in. Only five states, Nevada, Washington, Wyoming, Texas, and South Dakota, have no corporate income tax at the state level (taxfoundation.org).
- Franchise Tax: Most U.S. states require businesses to pay franchise taxes if they have a “nexus” there. Unfortunately, every state defines nexus differently, but it always involves a company’s physical presence in that state. Unlike income tax, a franchise tax is often, but not always, based on the net worth of the business. States with higher corporate income taxes usually have low or no franchise taxes, and vice versa.
- Sales Tax: If your company does business in a state that has sales tax and you sell goods or services, you may have to collect sales taxes from your customers on each transaction. You may face penalties for failing to collect this tax on behalf of the state. As of 2015, Alaska, Delaware, Montana, New Hampshire, and Oregon are the only states that don’t have sales tax.
- Gross Receipts Tax: A handful of states tax the total gross revenues of a company, regardless of the source of revenue. A gross receipts tax is similar to a sales tax, but it is levied on the business rather than the consumer. As of 2015, Alabama, Delaware, Florida, Illinois, New Mexico, Ohio, and Pennsylvania are the only states that have a gross receipts tax.
We recommend you speak with your tax specialist to nail down the specific guidelines for the states you could have tax liabilities in. However, two states worth calling out are California and Delaware, which are two of the most popular choices for companies to incorporate in, especially startups.
More than 60% of Fortune 500 companies are incorporated in Delaware, partly because it doesn’t have a corporate income tax. This large group of U.S. companies must file a Delaware Annual Report and pay the franchise tax or alternative entity tax. The First State does have a significant franchise tax, though, so while it may be the land of many incorporations, it is not home to quite as many physical businesses.
California, unlike most states, requires any company that does business in the Golden State to be registered with the California Secretary of State and pay taxes on all income, no matter what state they’re actually incorporated in.
Colleagues of mine have written more about these two states and their tax-related technicalities:
- Delaware Is For Lovers (Of Low Small Business Taxes)
- California Dreaming: How Delaware-Registered Companies Can Become Cali-Compliant
Forget About Your Federal Foreign Filing Requirements and You'll Pay the Price
The IRS is dead serious about tracking all income and does not have tolerance for anyone who neglects to report their financial information. It would be easy to potentially leave funds unaccounted for in international business—which many companies and individuals have been known to do intentionally. So, if your business has any foreign activities you MUST make sure the IRS knows about them.
- If you are a Foreign Corporation that generates reportable income in the U.S.:
- Fill out Form 5471.
- If your company has Foreign Partnerships (either all partners are from outside the United States or a combination of U.S. residents and foreigners):
- Fill out Form 8865.
- If your company has Foreign Shareholders:
- Fill out Form 5472.
- If your company has any Foreign Financial Accounts:
These are the quick-and-dirty basics of which forms you file in each foreign situation, but The International Entrepreneur's Guide to Filing U.S. Business Taxes goes into foreign filing obligations in greater detail:
Where you file is a big part of the picture, but you still need a full strategy:
If you’re looking for more ways to get ahead of your annual business tax responsibilities, be sure to download our free end-of-year tax pack designed to help busy business owners meet their deadlines, get organized, and lower their taxable income.