Moving to low-tax states can backfire on some business owners
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Low-tax locations may attract business owners more than ever these days, but these clients may not consider all of the factors before taking an equity stake or selling a business.
The temptation is however obvious. âMany northeastern states have high personal income tax rates, and compared to a zero-tax state like Florida, moving can be a pretty compelling proposition,â said James G McGrory, CPA and shareholder of Drucker & Scaccetti. in Philadelphia.
âIf clients are considering moving businesses to more tax-efficient states, it’s not just a tax decision, but a decision based on quality of life,â added Mike Kazakewich, Partner, Advisor and Director of planning at Coastal Bridge Advisors in Westport, Conn. âConsiderations include the talent and labor pool, cost of living, and the overall business environment of the new state. ”
âYou need a holistic approach to compare tax savings to other costs, including intangibles,â said Matthew Heckler, director of corporate executive services at Telemus Capital in Southfield, Michigan. to settle there – Covid aside – for other reasons, such as access, talent and prestige.
Business owners should remember that tax jurisdictions use many tools to generate income, including property taxes, franchise taxes, local earned income taxes, sales and use taxes, duties inheritance and local and national business costs. A key question: if there is a significant tax benefit, is it bearable or is there a risk of long and costly litigation in the future?
“It can be tempting to move before the tax is triggered on the sale [of a business]. The tax authorities are very aware that business owners can try to take advantage of this, âsaid Jessica Harger, Managing Director of Aon Transaction Solutions. These authorities âcarefully examine the facts and circumstances of a change of residence, especially if there is a significant tax impact and loss of tax revenue.
âIn an audit potentially years after the sale, tax authorities can look at how long the business owner resided in the new location before the sale,â Harger said. “If it is not clear that the business owner has truly changed residence to a low tax state and all the facts and circumstances support the change, the seller could end up with a tax bill. unexpected and important. “
Another key: Did the business owner structure the terms of sale to maximize after-tax net cash flow? âWith an asset sale, many tax saving strategies become moot,â Heckler said.
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