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Which states are most income tax friendly for small business?

States influence income taxes for small businesses

All businesses have to pay income tax, but some business owners are in a better position to pay less in taxes simply due to their address. While some states offer big tax breaks for small businesses, others have tax laws that are complicated and burdensome. To give businesses insight into where their state stacks up, the Tax Foundation has released their 2015 State Business Tax Climate Index.

According to USA Today, the index grades all 50 states on more than 100 different qualifications to determine how business-friendly their tax climates are. In order for a state to rank favorably, tax rates would need to be low and tax codes less complicated. Personal income tax and corporate tax laws also play a factor in where a state falls, given that the government actually obtains most of its tax revenue through the individual tax code, rather than the corporate tax code. The final rankings reflect how important personal income tax filing is when it comes to how much a business will end up paying in taxes. Wyoming ranks as the state with the most friendly tax environment, while the most taxing state is New Jersey. Among other states that have hostile tax environments for businesses are California, New York and Minnesota — while South Dakota, Nevada and Florida rank as business-friendly states.

A similar study recently featured in the Economist surveyed small business owners themselves to evaluate the local hiring, regulation, zoning, licensing, training and health insurance requirements for small businesses in 38 states and 82 cities. The feedback from small business owners echoes the qualifying measures of the Tax Foundation, with those surveyed citing complex codes and unnecessary bureaucracy as the most negative qualifiers that determine a state’s tax climate. For example, in Los Angeles, food trucks are able to park and operate on streets with little city interference, while in Chicago a food truck cannot operate within 200 feet of a traditional business and must maintain a GPS locator on their vehicle to prove they are complying at all times. Similarly, some states do not require these types of small businesses to account for sales taxes, allowing for a larger potential profit margin and fewer headaches when it comes time to file an income tax return. These types of rules can make small business operation simple or difficult, and contribute to additional tax burdens for owners.

Small business owners should make sure they’re familiar with their state’s tax laws. Even in states where the tax system is less friendly to businesses, knowing the details of how your income taxes will need to be filed will eliminate any unexpected charges at tax time and help ensure your business’s — and your family’s — continued prosperity.

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