You can’t escape taxes when running a small business, but depending on where you are located, you can minimize your taxable income. Small business tax requirements vary greatly from state to state, which means where you choose to set up shop significantly affects profitability.
When it comes to the tax man’s long list of demands, several tax types in particular can take a big bite out of your bottom line. These include property, sales, excise, unemployment insurance, and corporate and personal income taxes. Personal income taxes are one of the most significant, because 92% of small business owners file taxes as individuals by operating their businesses as “pass-through entities” (sole proprietorships, S corporations, and partnerships), according to the Small Business & Entrepreneurship Council.
These five states are rated as having the top five most favorable small business tax climates, according to the 2017 State Business Tax Climate Index from the Tax Foundation:
1. Wyoming
Considered the most tax-friendly state in recent years, Wyoming is one of only three states in the nation that levy no corporate income tax at all, and is among just seven states that levy no personal income tax. The state’s sales tax rate is one of the lowest in the nation at just 4%, and Wyoming’s unemployment rate was only 4.3% (as of November 2017). Excise taxes are also very reasonable. Property taxes are relatively high, however, at $2,109 per capita (according to the Tax Foundation’s 2017 rankings of states’ per-capita property tax collections).
2. South Dakota
South Dakota features a favorable small business climate with its low unemployment rate at 3.5%, as of November 2017. South Dakota’s sales tax rate is also attractive at just 4.5%. The state collects no personal or corporate income tax, although it does place a franchise tax on financial institutions. Property taxes in the state are considered mid-range (compared to other states) at $1,301 per capita.
3. Alaska
Alaska has no sales tax, providing small business owners with a major plus when it comes to retailing merchandise. There is also no personal income tax in Alaska. Due to the location of the state, it does feature particularly high excise taxes, and property taxes are among the highest in the nation at $2,639 per capita. The unemployment rate is also a little on the high side at 7.2% (as of November 2017).
4. Florida
Conditions are bright in the Sunshine State when it comes to small business taxes. Unemployment rates are fairly low at 3.6%, as of November 2017. Florida also has no personal income tax. Sales tax, however, runs a little high at 6%, and excise tax can also be costly. Property taxes fall mid-range at $1,184 per capita.
5. Nevada
Running a business in Nevada is an educated gamble when you consider that the state doesn’t charge any personal or corporate income taxes. Property tax is also fairly low at $953 per capita. Nevada does have a relatively high statewide sales tax rate at 6.85%, however, and the unemployment rate is one of the highest in the nation at 5.0%, according to November 2017 figures from the Bureau of Labor Statistics.
The tax man knocks no matter what, but if you run your business in one of these states, you can be assured that he isn’t rapping on your door as loudly as in some states. The relative advantages of these states — which tend to have low property taxes and no state income taxes — are likely to grow in the next few years, thanks to the new federal tax law that took effect Jan. 1, 2018. Starting with the 2018 tax year, there will be a limit of $10,000 that can be deducted for state and local taxes, including property taxes. This and other tax factors mean that 2018 could be a good time to start a business in a low-tax state.
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We moved from Pennsylvania to Colorado, based on several reviews and rankings. Since the tax demographics change nearly every year, Colorado has been ranked from top 2 to top 5 to top 10, now overall in 18th place.
Pennsylvania is now in the bottom half of all U.S. – ranked 34th, ref. above Tax Foundation document.
We calculated that we could have hired 2 part-time employees from the money we saved had we moved sooner. I would suggest that being a superior move to grow your business interests over paying into bureaucracies that get in your way and suck resources away from your intentions.
Besides, now our clients want to come see us in Colorado vs. Pennsylvania – and that is how we foster our relationships and trust best. In the 2 years of our move, we have tripled our business and we are in much better physical health to go even harder than before. Maybe it’s just our energies or whatever, but now there are 3 M&A coaching companies wanting to market our company to investors. I never thought I would see these numbers, but if we do this, I’m totally set.
Response to Ram
Please see my response to Paul.
Response to Paul:
The answer varies depending on the state. For example in my home state of Pennsylvania domestic (incorporated in Pennsylvania) and foreign corporations (incorporated outside Pennsylvania) doing business in Pennsylvania are subject to corporate net income tax and corporate loans tax. In addition, Pennsylvania corporations must pay capital stock tax, and foreign corporations must remit foreign franchise tax. You really have to check with the state.
Response to Paul: “Makes sense – thanks for sharing! The question for me is; do you have to physically move your business or simply register it in these lower-tax-rate states?”
The answer varies depending on the state. For example in my home state of Pennsylvania domestic (incorporated in Pennsylvania) and foreign corporations (incorporated outside Pennsylvania) doing business in Pennsylvania are subject to corporate net income tax and corporate loans tax. In addition, Pennsylvania corporations must pay capital stock tax, and foreign corporations must remit foreign franchise tax. You really have to check with the state.
Paul, this depends on what good/service you provide, and should be asked from a professional tax accountant. A word to prepare for may be “nexus” 🙂
Julie, Ben, (and Hannah) Excellent article! Too many states think that they can tax the businesses more and more, and the businesses will just stay there.
Thanks for the feedback Larry!
Thanks Julie and Ben.
Same question as Paul. My business is in Georgia. Is it possible to keep the business physical location in Georgia and avail some of the low tax benefits by registering in one of the low tax states?
Paul, most states are very interested in whether you are “enjoying the care and protection” of the state. In other words, if you’re operating in State A and need to sue someone, or get sued, you’ll be using State A’s courthouse, support staff, judges. So while there are many fine lines about registering in one state and operating in another, (too many to list in a website forum,) many states are very interested in whether you’re earning money due to their care and protection but not paying the related bill for that care and protection.
California need I say more?
Connecticut has to be one of the worst states, in terms of taxes both, personal and corporate and cost of living.
We moved from PA to Colorado. More business friendly and quality of life is hard to beat for the outdoors – one of our “quirks” as a condition for where we live.
Our incorporation was withdrawn from PA, which took a few months to clear from the PA state depts of revenue and taxation.
Our house in PA took awhile to unload and no, we did not break even let alone make money on the PA home sale.
We calculated from the property taxes, local merchant taxes in the Lower Merion Township and the state taxes, that we could have hired at least 2 part-time semi-retired professionals to help us grow our business, had we started in one of the subject 5 states or Colorado. Which would you rather fund – state bureaucrats’ kids tuition or your own?
While Colorado is trending “Blue”, they do also have “recalls” when election results stray too far. So far, the numbers still justify our move. If they start to turn anti-business, as PA had been, we have options to move again. And, where we live, the houses sell fast due to the favorable property values serving as investments vs. PA results.
Makes sense – thanks for sharing! The question for me is; do you have to physically move your business or simply register it in these lower-tax-rate states?
Thanks,
Paul
And that’s why i have two companies, one of them set up in Wyoming. The Wyoming Secretary of State and WYOSHA are very good to deal with, and I received some complex documents in minutes, that I think would have been a half-day on the phone back in New York to even find the right person to speak with. Even if you don’t live in Wyoming, you can set up a corporation there. Many corporations are headquartered in Delaware for tax and for legal reasons, and Wyoming is at least as good as Delaware.
Carl – Thanks for the information!
Great information! Thank you for your time and research. I already knew that my state, Virginia, was NOT on the list; however, I did expect Tennessee would be there, rather than Florida. Now If I could just find a way to move to one of those states…
Excellent article you have my attention
Thanks for reading, John!