As the business marketplace and available resources have changed course since the beginning of COVID-19, there’s no doubt that your firm and your clients have also made changes to survive and grow. Many businesses have considered downsizing their infrastructure needs, as remote working continues to be encouraged, while others – including tax and accounting practitioners – may decide to move to another city or even out of state. Here are some questions that will not only help you understand the tax implications for yourself, but also give you a better framework on how to advise your clients.
Where should you move to?
First things first. There are states with no income tax, a flat income tax, and a graduated rate or progressive income tax. If your clients are trying to decide where to move, you may suggest they move to these types of states. For example, there are eight states – Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming – that have no income tax. In addition, New Hampshire taxes only dividend and interest income at 5 percent.
Another point to consider is what may be defined as “income” in each state. Most states use federal adjusted gross income, but some use federal taxable income to tax.
When should you move?
If your client moves in the middle of the year, they may have to file state income tax in both states where they lived. However, some states may consider them a full-year resident if the person can prove residency by living at least 183 days in the new low- or no-tax state. If moving permanently, they could consider dissolving the business at the right time to avoid tax implications in the old state.
For maximum tax benefits, it is advisable to research each state’s residency guidelines in detail prior to moving.
What may not move with you?
While a client may move their business, what may not move is the intangible property owned in the old state. if someone has property in the old state, it will create a physical presence of the business and, as a result, create nexus in that state. Each state has different nexus standards for different taxes, and if there are income and expenses related to that property, the person may end up filing taxes in both states. Based on business requirements, some companies may need to have properties, such as warehouses, in different states. As a result, it is important to note that certain activities in each state can generate nexus and filing requirements, as well as understand nexus standards in each state before deciding to move.
What other sources of income do you have?
If your clients have tangible personal property, such as equipment, then these things may move with them. If the state taxes tangible property, the client will need to file a Tangible Personal Property tax return.
Just like income from real estate, other investment income, interest, and dividends may end up being taxable in both states. Some states, including the District of Columbia, tax all realized capital gains, and allow a deduction of up to $3,000 for net capital losses. New Hampshire fully exempts capital gains, and Tennessee taxes only capital gains from the sale of mutual fund shares. This is why it is necessary to help your clients review all sources of their income and financial assets before deciding to move.
Who may not move with you?
Loyal employees may choose to stay employed with the business, but may not necessarily make the physical move. When employees decide to work remotely from their home state, this will likely create nexus in that state for the company. However, several states are providing some nexus relief in response to having a remote workforce due to COVID-19. Help your clients do their research and consider such nexus relief benefits to retain their employees. Other states, such as Maryland, have not provided nexus relief to employees working from home, so if an employer is located in Maryland and employees are working from home in, for example, New Hampshire, Maine, and Rhode Island, the employees are still considered Maryland employees for income tax withholdings.
What else is there to consider?
There are various other matters to be considered while preparing for the move.
- Even though a state does not have income tax, it may have other taxes, including property tax, sales and use tax, franchise tax, local business tax, and entity-level taxes. States with no income tax, such as Texas, rely heavily on other taxes, such as property tax, with a rate as high as 1.81 percent to meet their ends. At the same time, Hawaii, a state that levies high-income tax, keeps their property taxes as low as 0.28 percent. In Nevada, you may not have to pay income tax, but you will end up paying 8.25 percent sales tax on purchase of a vehicle. In addition, sales and use tax laws often differ between states. For example, if your client is a software-as-a-service company, the business could be taxable in some states and not others. Carefully review each one based on the industry type.
- For a permanent move, advise your clients on how to consult experts to dissolve their business in the old state to avoid any tax penalties. They will also need to register the business in the new state, along with their tax status selection. In addition to other requirements, they will need to set up payroll in the new state, as well as apply for state licenses and necessary permits.
- Moving just to get a tax break – without making sure the new location is favorable to a company’s employees – has to be considered. The standard of living must be favorable when the client is moving with their family.
- Along with reviewing sources of income, help the client review the tax implications of moving on the family’s sources of income.
Like any other major business decision, moving a business has several implications and requires careful considerations, as well as detailed research. Put on your trusted advisor hat and help your clients maximize potential tax benefits – or be more aware of the liabilities. If you’re moving your firm to another state, good luck!