For entrepreneurs, there may be no single greater tax tool than the ability to form a company. Incorporating carries unparalleled benefits for business tax solutions. In most states, you’re able to spread operating losses over seven years to offset taxes in profitable years; you’re not subject to self-employment taxes; and you can make tax deductions for employee benefits and business purchases.
That’s the baseline, and it’s a great start. But tax advantages at the state level can change the game, and for that we must find those states with the most favorable tax laws.
Frontrunners – Nevada and Florida
Two states stand out amongst the rest for tax benefits. Florida and Nevada offer the most tax breaks, lowest tax rates, and plenty of ancillary benefits to small businesses. For example, neither state has individual state income tax; by comparison, Ohio’s individual income tax starts at around two percent at the poverty line, and goes up from there. Neither Florida nor Nevada has a unitary or franchise tax, two taxes with major implications on out-of-state operations (or those thinking of incorporating in from another state). Both have exceptional privacy laws and business-friendly safe harbor laws.
But which one has the edge on tax breaks – and is enough that you should consider incorporating across state lines?
In Florida, the only business entity required to pay state income tax is your standard C. But remember: you can structure your C Corp to take advantage of tax exemptions. Making the IRS Subchapter S Election will exempt your corporation from both federal and Florida state income tax altogether.
Even if your business remains a C Corp and therefore subject to corporate income tax, Florida has one of the lowest state rates in the country: 5.5% on taxable federal income, with qualifying exemptions bringing the minimum annual rate down to 3.3%. In any case, the first $50,000 in corporate income is totally exempt in the State of Florida, making it ideal for small businesses. To top it off, Florida provides complete tax exemption for business-to-business software sales.
Nevada does away with corporate income tax altogether, although there is a $200 annual business license fee for all business entities. Nevada has no gift tax, and there is no tax on corporate shares. Additionally, state legislation allows shares to be issued for a wide variety of consideration, from capital and in-kind services to personal property and real estate, which allows for creativity in stock transfers.
Nevada law also offers statutory indemnification of officers, directors and employees, the highest standard for piercing the corporate veil (a legal concept by which claimants can reach business owners’ personal assets), and a business court for legal disputes.
Both Florida and Nevada offer significant tax advantages over most other states, but the edge likely goes to Nevada for its ease of access to nation-leading tax exemptions and favorable statutory law.
If you are considering incorporating a business in Nevada, Florida, or any other state in which you do not physically reside, keep in mind that you will need to register as a foreign business in your home state, and you’ll still need to pay income taxes in your home state where applicable. It all comes down to a question of accounting, and you should consult your business accountant and attorney on the matter.
Gertsburg Licata is a full-service, strategic growth advisory firm focusing on business transactions and litigation, M&A and executive talent solutions for start-up and middle-market enterprises. It is also the home of CoverMySix®, a unique, anti-litigation audit developed specifically for growing and middle-market companies.
This article is for informational purposes only. It is merely intended to provide a very general overview of a certain area of the law. Nothing in this article is intended to create an attorney-client relationship or provide legal advice. You should not rely on anything in this article without first consulting with an attorney licensed to practice in your jurisdiction. If you have specific questions about your matter, please contact an attorney licensed to practice in your jurisdiction.