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The Best and Worst States for Business-Related Taxes

Where to Set Up a Business to Avoid Paying Heavy Taxes

 

Which states have the lowest taxes for businesses?

Businesses have been trying to avoid high tax percentages since the moment governments began imposing taxes. Unfortunately, as the saying goes, the only two sure things in life are death and taxes, so everyone has to pay them regardless of whether or not they want to (and most people don’t want to). At the same time, state governments want to incentivize businesses to move to their areas of jurisdiction and boost the economy in doing so. As a result, the tax codes of various have been structured in ways that the governments believe will both attract businesses due to low rates and also bring in sufficient tax revenue to keep state programs running.

The impact of these varied state tax codes is that certain states are better for business than others, with rates varying for various types of taxes. This guide will explain five of the most important state taxes to a small business owner and where they can establish their business in order to give up as little of their money as possible. While these numbers do not account for the federal taxes that apply to each state or the local taxes within the individual areas of states, it can give you a good idea of which states will put you in the best position to save your money from being taxed.

The Individual Income Tax

What is the individual income tax?

The individual income tax is a tax that a person pays based on the total amount of money they make in any given year. This tax takes a different percentage of income depending on how much the individual makes, with those making more money paying a higher percentage of their income as individual income tax. This tax tends to be the one that Americans find the most frustrating and stressful, because not only is it a tax that everyone must pay regardless of their profession (in states that have it) but also because personal income taxes can take a pretty significant chunk of a person’s income, especially if they are in a higher income bracket.

States with the lowest personal income tax (all tied for first at 0% at all incomes)

  • Wyoming
  • Washington
  • Texas
  • South Dakota
  • Nevada
  • Florida
  • Alaska

States with the highest personal income tax (lowest to highest, ranked by highest)

  • California (1 to 13.3%)
  • Minnesota (5.35 to 9.9%)
  • Oregon (5 to 9.9 %)
  • C. (4 to 9%)
  • Iowa (.36 to 9%)
  • New Jersey (1.4 to 9%)
  • Vermont (3.55 to 9%)

 

The Sales Tax

What is the Sales Tax?

The sales tax is the only tax on this list whose burden is not placed entirely on the small business. Rather, the sales tax is costly to both the consumers of a product and the business that is selling it. When an individual goes to the store and purchases an item or service, they pay the sales tax as an extra sum of money added on to the price that they are already paying. The sales tax is calculated as a percentage of the purchase price, however, which means that businesses might sell less in a state with a higher sales tax as consumers become disenfranchised with the increased prices.

States with the lowest sales tax (all tied for first at 0%)

  • Alaska
  • Delaware
  • Montana
  • New Hampshire
  • Oregon

States with the highest sales tax

  • California (7.25%)
  • Indiana (7%)
  • Mississippi (7%)
  • Rhode Island (7%)
  • Tennessee (7%)

 

The Corporate Income Tax

What is the corporate income tax?

The corporate income tax works a lot like the personal income tax, except the money is taken from a corporate entity rather than an individual. Much like the personal income tax, this tax has brackets that increase in percentage of total income taken as companies become more profitable. Many companies avoid paying a corporate income tax by becoming special kinds of companies: see our article on the various types of business structures for more information. If your company’s goals align with the corporate structure that requires you to pay a corporate income tax, however, you might want to consider moving to one of the following states.

States with the lowest corporate income tax (all tied for first at 0% at all incomes)

  • Nevada
  • Ohio
  • South Dakota
  • Texas
  • Washington
  • Wyoming

States with the highest corporate income tax (lowest and highest bracket, ranked by highest)

  • Alaska (0 to 9.4%)
  • California (8.84% for all incomes)
  • Iowa (6 to 12%)
  • Maine (3.5 to 8.93%)
  • Minnesota (9.8% for all incomes)
  • New Jersey (9.8% for all incomes)
  • Vermont (6 to 8.5%)
  • D.C. (9% for all incomes)

 

The Capital Gains Tax

What is the Capital Gains Tax?

The capital gains tax is a tax that will not affect a businessperson who holds their stocks, real estate, and other properties without ever selling, but is crucial to consider for someone who is involving in the buying and selling of assets. This tax takes some of the profit away from the seller of an asset on the occasion of their selling of the asset. Therefore, while it might only be a one-time-per-deal tax, it can have a serious effect on the income of people in certain industries or people who are selling their business.

States with the lowest Capital Gains Tax (all tied for first at 0 percent)

  • Alaska
  • Florida
  • Nevada
  • New Hampshire
  • South Dakota
  • Tennessee
  • Texas
  • Washington
  • Wyoming

States with the highest Capital Gains Tax

  • California (13.3%)
  • Minnesota (9.9%)
  • Oregon (9.9%)
  • C. (9%)
  • Iowa (9%)
  • New Jersey (9%)
  • Vermont (9%)

 

Bringing it All Together

With all of these different taxes in mind, it is important to note that some businesses will benefit from not having to pay certain taxes while other businesses may be better off in a state that doesn’t have different taxes. The industry, size, and goals of your business will all impact which taxes will hurt your company the most, so make sure you are well educated on the tax situation of your industry before making a decision on where to start or move your business.

Because taxes can sometimes make it difficult for businesses to turn a profit, it can be crucial for your company to have as much cash in hand as possible so that you can continue to grow and profit from your business regardless of the local, state, or federal tax situation. Give Factor Finders a call today to learn more about how you can get cash now and make sure that you are getting the most out of your business.

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