Location, Location, Taxation

As the talk about tax reform increases in Washington, the actions of businesses are moving that one step faster.  Even with the current real estate relocation challenges businesses are making the effort to locate in a way that mitigates their tax burden.  One big example appeared in this week’s Wall Street Journal  where they detailed how many US based companies that have the opportunity to incorporate offshore prior to an IPO (lots of restrictions on this, but it can be done) are making sure to do so.  Another area that’s getting plenty of attention now is state taxation.  Certainly the buzz I hear is that companies are doing the tax math in terms of both their initial location and how they grow the business.

The Small Business & Entrepreneurship Council just released their Business Tax Index of 2011 ranking the 50 states in terms of tax friendliness.   The top five friendly states are:  South Dakota, Texas, Nevada, Wyoming and Washington.  The five worst:  California, Maine, Iowa, New York, New Jersey, Minnesota and Washington DC.  (I don’t know if that last one is supported by data or emotion.)  Speaking from my own limited experience I would say that New York, California and New Jersey don’t make it easy for small business owners in terms of taxes.  In particular, they have a thicket of fees for corporations located outside of the state who do business in the state that make the airlines look like they have transparent pricing. 

Of course, the issue is more nuanced than just thinking about income taxes.   For example states that have no income tax like Texas and Florida have other “fees”  that impact the bottom line of a business the same way a tax does.  A recent Ernst & Young study on the topic noted that income taxes from businesses make up a relatively small portion of state budgets, but that in 2009 property taxes collected from businesses by states  went up.  In the midst a huge commercial real estate crisis, business property taxes collected are going up?!  The other direct tax issue to consider is personal vs. corporate tax rates.  Many small business owners pay taxes on their profits via their personal returns, so that’s an important factor to consider. 

Like everything else involving taxes it’s not straightforward, but doing the math during your tax planning time rather than at filing time is worth the effort.