Keeping your business afloat is difficult when you’re hit with unexpected small business taxes. They, along with fines, can push business owners who are barely making ends meet into a pile of debt that’s tough to climb out of. Locating your business in a state that provides tax help to small businesses can help you avoid this situation.
Small Businesses, Big Costs
A tax rate of more than 50 percent: Does that even sound possible? In many states, it’s reality. Opportunity Lives highlighted a recent Tax Foundation analysis that found that many small businesses face such tax rates when state and federal taxes are combined. Sole proprietorships and partnerships are hit the hardest because taxes are passed through the business directly to the owners’ personal income. Limited liability companies and other business entities may face the franchise tax. How can a business survive on taxes so steep?
If a small business owner doesn’t pay his estimated taxes on time and correctly every quarter, he could face fines. Estate taxes can be as high as 40 percent, discouraging small businesses from saving for the future. Health insurance costs take out another chunk. And businesses with employees may face unemployment taxes, workers’ compensation taxes, and taxes on temporary disability costs.
Tax-Related Expenses
Taxes and fines aren’t the only charges depleting business revenues. Figuring out how to comply with tax law can be expensive, too—some small businesses pay $5,000 or more each year simply to get their taxes prepared, and more than half spend at least a week of work time filling out tax forms. This is a huge loss of income in addition to the taxes themselves.
The Best States for Entrepreneurs
The Small Business and Entrepreneurship (SBE) Council compiles an annual list of the best and worst states for entrepreneurs in terms of taxes. Based on the council’s various considerations, the five best states for small businesses in 2014 were Nevada, South Dakota, Texas, Wyoming, and Washington. The five worst were California, Minnesota, New Jersey, Hawaii, and Iowa.
The SBE Council notes that some states purposefully provide business-friendly tax environments in an effort to attract more entrepreneurs. No state in the top five charges a personal state income tax or a corporate income tax. The personal income tax is significant, because many small businesses file as sole proprietorships or as partnerships.
Attracting Businesses Through Tax Incentives
States with low capital gains taxes are often more attractive to new businesses; capital is one of the hardest things to obtain, after all. According to the SBE Council, high taxes reduce a business’s return on investment.
Other initiatives states use to encourage entrepreneurs include not adding additional taxes to S corporations, not imposing a state alternative minimum tax, indexing to ensure inflation doesn’t push someone into a higher tax bracket, and offering low property taxes to encourage businesses to plant roots.
Although many factors impact how taxes affect small businesses, these are the major influencers. States that keep small business taxes in check tend to encourage business growth and help entrepreneurs survive in the face of high federal taxes. Want a better shot at succeeding in business? Consider the tax implications of the state in which you set up shop.
