Business Relocation and Tax Issues

When it comes to relocating a business, taxes have a way of influencing almost every decision you need to make, from site selection to how to set up your organization. If you’re thinking of moving your small business to another state, here are some brief tax-related thoughts to spark a discussion with your tax consultant.

Tax Incentives for Relocation

While usually not the primary reason for relocating, tax-related benefits do play an important role in the decision-making process. Many executives find incentives such as tax abatements or credits offered by cities or states more attractive than low property taxes or sales/use taxes. Why? The ability to negotiate the amount of incentives, to receive special compensation not available to every business, is a key factor. Yet not all incentives are created equal, and what the government gives, the government can take away.

The size of your business and its potential impact on the community it's relocating to may affect your negotiating power for tax incentives. In some situations, incentives have been tied to production levels or the number of employees hired from the local community, giving large organizations more potential clout than small businesses at the bargaining table. If you want to pursue incentives as a small business owner, come to the table armed with information on your business’s growth potential and on what your business can do for the community.

Setting Up Shop in Another State

Another tax issue that often plays an important role in the relocation decision is how a business will operate in a new state. If you have a sole proprietorship or a partnership and will maintain that status in the new state, you simply register to do business in the state by filing a DBA (doing business as), and then you benefit from whatever the state has to offer sole proprietorships or partnerships in the way of tax advantages. But if you have a corporation or a limited liability company, the process can become more complicated, with more choices and potential tax advantages and disadvantages. You can continue the company in your old state and register as an out-of-town or foreign corporation in the new state. You can close out the company in your old state and form another company in the new location. Or you can reorganize your business, forming a new company in the new state and merging the old company into the new one.

Which is the best way to go? There are pros and cons to each choice depending on your business and the tax structure/regulations of your old and new state. For example, if you’re moving from states that are pro-business such as Nevada, South Dakota, or Wyoming with strong tax advantages, you might consider continuing the company in your old state and registering in the new state as a foreign corporation.

What to Deduct or Capitalize

You’ve selected the location, you’ve set up your business, and now it’s tax season. What can you write off from the relocation? Whether you have a sole proprietorship or a company, you can usually deduct your bill from your accountant or lawyer related to tax savings and advice and the cost of moving furniture and equipment for the relocation. If you and your consultants have researched other sites in addition to the one chosen, professional fees relating to those rejected sites can usually be deducted as well as related travel and meeting costs. Consulting fees for the relocation and expenses for activities such as new enterprise installations are often capitalized and amortized or depreciated.

For all tax issues, look to your tax consultant. Knowing the tax benefits and consequences of a move for your business can reduce stress and help you make smart, profitable decisions.