By Kate Russell, CPA, Senior Manager
In the business world, we all know Uncle Sam gets the spotlight when it comes to taxes, but let’s not forget about his quieter, sneakier cousins: state and local taxes (SALT). They might not demand as much attention—or as much money—but they have a knack for showing up when you least expect them. Failing to stay on top of them can lead to unnecessary penalties and fees. Keeping them in check isn’t just wise, it’s a more cost-effective approach in the long run. Conducting a thorough review of your SALT obligations ensures your company stays compliant while maximizing potential credits and deductions. Below are five key areas for businesses to consider before making their next tax payment:
1. Understanding Business Nexus Requirements
Nexus refers to a business’s connection to a state or local community such as a city or county, that may require the business to have certain obligations, such as registration, collection of taxes, and filing returns. Some states enforce “economic nexus” rules, which can apply even if the business lacks a physical presence. Reviewing nexus requirements can prevent unnecessary filings or missed obligations. While nexus rules vary by state, common indicators of nexus include:
- Storing inventory at a third-party warehouse
- Using mobile or movable property in the state
- Employees living and/or working in a state
- Employee visits to the state, even for a few days each year
- Independent contractors conducting sales or services
- Financial transactions or sales involving to customers in the state
2. Leveraging Public Law 86-272 Protections
Under Public Law 86-272 (PL 86-272), businesses are immune from state income tax if their only connection to a state is soliciting sales of tangible personal property, and the property is shipped from outside the state.
However, this protection is limited and doesn’t cover all activities or types of income. With the rise of online sales, remote workers, and service-based businesses, PL 86-272 protections may apply less frequently, but they remain valuable in the right circumstances.
3. Navigating Multi-State Apportionment Methods
Apportionment determines how a company’s income is allocated among states for income tax purposes. While most states use sales-based apportionment, variations exist, so attempts to use a uniform method across all states may result in over or underpayment. Key considerations include:
- Market-based vs. cost-of-performance sourcing for services and intangibles
- Allocation of nonbusiness income
- Apportionment for partnership interests
- Treatment of gains, interest, or dividends
- Special elections for specific revenue streams
- Reviewing and aligning your apportionment methods with each state’s rules can lead to significant savings
4. Choosing Beneficial Filing Methods for Affiliated Groups
Some states impose additional taxes depending on how affiliated businesses file. For instance, unitary businesses may need to report income on a combined basis, which could increase their tax liability.
However, alternative filing options, such as separate entity or consolidated filing, might provide more favorable outcomes. Even if a group files as an affiliated group for federal income tax purposes, it may not need to consolidate for state income tax returns. Exploring these options can help businesses minimize their SALT burden.
5. Pass-Through Entity Taxation Benefits
Pass-through entities, like partnerships and S-corporations, enjoy tax advantages at the federal level, but state-level treatment varies.
Many states have introduced workarounds to the federal $10,000 SALT deduction cap for pass-through entity owners. These allow the entity to elect to pay owners’ state taxes directly, providing a full SALT deduction at the federal level. Businesses should evaluate whether this option applies and offers financial benefits.
STAY AHEAD OF SALT COMPLIANCE
Navigating state and local taxes can be complex, especially for businesses with multi-state operations. Regularly reviewing your SALT obligations helps avoid penalties, identify savings opportunities, and maintain compliance.
State and local taxes might not make the same grand entrance as federal taxes, but they’re always lurking in the background, ready to trip up the unprepared. Staying ahead of them means fewer surprises and more savings for your business. So don’t let Uncle Sam’s cousins catch you off guard, work with your trusted MichaelSilver tax professional to make sure your business is taking full advantage of every opportunity. We can be reached at 847-982-0333.
Kate Russell, CPA, Senior Manager, has a wealth of knowledge in multiple areas of taxation and has worked primarily with business clients to formulate tax strategies. Since joining MichaelSilver in 2018, she has become a member of the international team working with clients across the world as they enter the U.S. market. Kate received her Bachelor of Science in Business from Minnesota State University, Mankato, with a Major in Accounting. She is a member of the AICPA and sits as a committee member of the International Subcommittee of the ICPAS.