Moving your business to a new state? Do this homework first
There are many reasons why a business owner might want to relocate to a different state. Maybe you want to be closer to family. Perhaps it’s political. Or you might just need a change of scenery.
But if the goal is to reduce your tax bill by settling in a more tax-friendly state then you've got some homework to do, regardless of whether you plan to keep it running or sell it.
Two or three times a week I have the conversation with a client about moving their business to another state. Anyone who's contemplating a similar move should talk it over with their financial advisor to tease out some of the issues the business owner might not be thinking about.
Not off the hook for tax bills
For one, simply moving your residence from one state to another isn't going to get you off the hook for a tax bill in your old one if you still have business operations there. The term of art here is nexus, which could be a retail store, a warehouse or even an employee who lives and works in your former state. If you meet a state's nexus requirement — often called the physical presence standard — then you're going to be on the hook for taxes there, to be filed as an out-of-state resident.
Second, just saying you moved your residence might not be enough. While the playbook that state auditors run is constantly changing, it’s well established you’ll need to pass the domicile test. This test essentially tees up the question, “When did you make your new residence your home?”.
Consider this scenario: You want to sell your business for a million dollars and not pay taxes on the transaction. So you claim residence in a state with no income tax. Fine. But did you really make that second house your domicile before you executed the transaction?
I always tell clients that they will want to keep a detailed log documenting their moving process. It's not the sale date that an auditor will want to see. Instead, they’ll want to know when you started moving personal things—family pictures, photo albums, etc.—to the new residence. Again, when did you make that house your home?
Auditors know all the tricks
Auditors, especially in tax-advantaged locations such as Florida, know all the tricks so business owners should be prepared to justify every move they make when setting up shop in a new jurisdiction. Likewise, they shouldn't assume that they're done in the states they're leaving behind. States like California and New York are famous for pursuing people to the ends of the earth when they feel there's tax revenue owed, but other states are getting savvier about that, as well.
And as complicated as the tax codes are from state to state and locality to locality, it might be time for business owners looking to make a move to seek out a new advisor who's an expert — or can put them in touch with an expert — in the laws and rules of their new home.
Bruce Willey, JD, CPA, is the founder of American Tax & Business Planning, LLC. He has been advising business owners on accounting, tax and wealth-building strategies for more than three decades. To speak with him or another ATBP expert, please reach out here or at https://www.americantbp.com/contact-american-tax-and-business-planning.