Empowering Healthy Business: The Podcast for Small Business Owners
The Empowering Healthy Business Podcast is THE podcast for small business owners seeking to balance having a nicely profitable business, a sustainable, scalable, and salable business, lower stress levels, better work-life balance, and improved physical and emotional fitness. Yes, this is possible! Though it’s not easy. We’re here to help you navigate toward this objective.
Empowering Healthy Business: The Podcast for Small Business Owners
#7 - Navigating State and Local Taxes
Are you ready to conquer the labyrinth of state and local taxes in the United States? We'll arm you with the knowledge you need in our conversation with Greg Reed, the tax partner at SmartBooks Tax and Advisory. With each of the 50 states brandishing unique tax rules, business owners can be facing a sizeable obligation. Listen in as we dissect the multitude of taxes - from sales to income and the seemingly infinite list that follows.
A simple venture into tax compliance can quickly turn into an uphill climb. Together with Greg, we unveil the challenges in registering and sustaining state registrations, the repercussions of non-compliance, and how to steer clear of these traps. We also delve into the implications of the Wayfair decision and its potential to hold businesses accountable for back taxes, penalties, and interest across multiple states.
State and local taxes are a fundamental aspect of conducting business. Join us as we unpack the nitty-gritty of these taxes, including minimum taxes, use taxes, property taxes, and payroll taxes. We investigate the tactics employed by states and the impacts of upholding tax compliance in multiple jurisdictions. We'll hear Greg's insights on the best strategies for managing tax compliance, avoiding penalties, and maximizing potential credits and apportionment strategies. Don't miss this opportunity to safeguard your business from weighty compliance issues.
Connect with Greg at:
smartbookstax.com
Sponsored by SmartBooks. To schedule a free consultation, visit smartbooks.com.
Sponsored by SmartBooks. To schedule a free consultation, visit smartbooks.com.
Thanks for listening!
Host Cal Wilder can be reached at:
cal@empoweringhealthybusiness.com
https://www.linkedin.com/in/calvinwilder/
Welcome to the Empowering Healthy Business podcast, THE podcast for small business owners. Your host, Cal Wilder, has built and sold businesses of his own and he has helped hundreds of other small businesses. Whether it is improving sales, profitability and cash flow; building a sustainable, scalable and saleable business; reducing your stress level, achieving work life balance, or improving physical and emotional fitness, Cal and his guests are here to help you run a healthier business, and in turn, have a healthier life.
Cal Wilder:Today, I'm rejoined by Greg Reed, who's the Head of Tax at SmartBooks Tax & Advisory. Welcome back to the podcast, Greg.
Greg Reed:Thanks for having me back.
Cal Wilder:So last time you were on, you presented some tactics that small business owners can use to pay lower taxes. And that was exciting as it was helping people put more money or keep more money in their pockets. Today, the topic might be less exciting as it's more compliance based about staying out of trouble. But I think we'll see that especially today versus a decade ago, it's just as important to address this whole podcast is around empowering healthy business. And part of being a healthy business is managing risks in compliance to stay out of trouble and be sustainable. So before we dig in, I'll just share one more observation over the years with helping hundreds of businesses navigate conducting business in the US, which has a reputation is a very easy country to conduct business in. But when it comes to state and local taxes, it's very challenging, can be operating in more than one jurisdiction, we've got 50 different states with 50 different sets of tax rules. And within those states, we've got, you know, some time city and town level tax issues to deal with as well. And so I work with some international clients based in Europe that really struggled to understand why it is so complicated to operate in the United States. So I'm excited today you're gonna help us navigate the challenges of, of state and local taxes.
Greg Reed:Yes, yeah, state and local taxes are very, very tough to navigate. every state, every county, city municipality has generally their own set of laws. So trying to make sure that you stay in compliance across the board can be very tricky.
Cal Wilder:There are a number of different tax related topics we could cover. Why is this one so timely to discuss now.
Greg Reed:So the states are really starting to get smarter, they are sharing information with other states, they are sharing information within different departments within the states. And they are sharing states information with the IRS. With all that information sharing, they're figuring out how to correlate that and I don't want to say catch people, because a lot of people aren't doing this maliciously. But they're figuring out who is in compliance, and who is not in compliance with various state filings.
Cal Wilder:Yeah, I can see, you know, I can see how just the the number of different jurisdictions that businesses are operating in has probably increased over the past, you know, several years with the rise of remote work, especially accelerated after COVID lockdowns, and most people working from home for a year or two. And so I think businesses are probably finding themselves with employees who are living and thus also working, you know, from home in more different states than ever. And I can tell you, from my own experience, trying to hire good people in this tight labor market, you know, sometimes we just need to hire an employee in a new state when you find that great candidate, and I'd rather not, you know, employ somebody in another state and have to do with compliance for another state. But, you know, if I need to make a key hire, and I found a great candidate who happens to live in the new state, I'd certainly be tempted to bite the bullet and make the hire and figure out how to comply with that new state.
Greg Reed:Absolutely. As with most other things, COVID19 definitely flippe the script on on a lot of things. remote work, obviously being a big one. A lot of states gave business owners a little bit of a break, thinking okay, maybe you know, eventually, that person who worked in New York but now lives in New Jersey and works is going to eventually be back in it. In the city working and that necessarily isn't the case, I think a lot of businesses have found that they can be just as productive having remote employees and not having to have that overhead. So now we're starting to see businesses who are employing, like you said, employing people remotely. But they're not necessarily thinking of the repercussions of that from a tax standpoint.
Cal Wilder:We've been referencing all these state and local taxes, but really, what are the different kinds of taxes that we're talking about now.
Greg Reed:So there's a whole list. The common taxes that you'll often run into are sales taxes, franchise, excise and income taxes, they are those those are three forms have a tax on income, that various states will charge, one for in one form or another. Property taxes, real estate taxes, you have payroll taxes, and withholding. Withholding is not necessarily tax, but you have withholding requirements. And then you have taxes on the on pass through income, potentially, if you're a an S corp, or a partnership.
Cal Wilder:Okay, well, sir, we'll we'll talk about each of these in a little more detail as we go. To understand them, but, you know, how do we go about understanding whether we have liability for these taxes in a particular state or city?
Greg Reed:So I always talk to my clients and say it's kind of a two step process. Generally, you're going to have, you have to develop what they call nexus in a state to have a tax requirement. So the first question I get is, what is Nexus? Nexus is your business's connection with a state or local taxing authority? It's created really one of three ways. It's, it's created where you, it's based on where your customers are. So like, we're selling to it based on where you own or lease property. So if you're, if you hold inventory, that's a good example of people who sometimes get caught, they might say, Oh, I don't have any. I don't have any connection to Connecticut. But then you find out that they have inventory sitting in that state, you know, waiting to be delivered to the New England area. And unfortunately, that does bring them into-- that does create nexus.
Cal Wilder:We could be talking about, a third party fulfillment operation that runs a warehouse or something.
Greg Reed:Yes. And it does get a little tricky with Amazon, because Amazon does handle some of that. And it because you don't actually know where your goods might be. But keeping it simple, if you have a third party operator who is holding your inventory that isn't, you know, Amazon, and you know, where that inventory is the one that could certainly create nexus for you, but that's just one, just one example. And then the third one is, like we already discussed, where your people actually work. And it some states actually will try to grab you if you just have contractors in that state. So it's not just your W two employees either.
Cal Wilder:Okay. So, you know, let's say you've analyzed all those factors and realized you do have some nexus in states. How do you go about, you know, registering to comply with those state requirements? What's involved there?
Greg Reed:So once Nexus is developed, you know, okay, we're in the state, we have a filing requirement, one or several. You got to register to do business in that state. So step one is to file with the Secretary of State. That just, again, sets you up legally in the state to transact business. The second registration is with the state taxing authority. For example, you have the Massachusetts Massachusetts Department of Revenue, the California Franchise Tax Board. Those are just you know, kind of the the two big ones that the ideal But mostly.
Cal Wilder:Yeah, I would add also, when it comes to payroll tax, you know, there usually are multiple state tax agencies to deal with, there's usually one called, you know, Department of Revenue or something like that, that deals with income tax withholding tax, and then there's a Department of Labor or like Employee Services Division or something that deals with unemployment. Unemployment websites are notoriously difficult. They're like the worst websites to ever try to navigate and register and, and work with, but, you know,
Greg Reed:They certainly don't make it easy.
Cal Wilder:Definitely, you know, usually there's at least two if not, you know, often three state tax agencies they have to register with and manage.
Greg Reed:There may actually be some local authorities that, you know, City, New York City, I would imagine has something that perhaps you need to register for. These are just things that if you're not thinking about them, then you need to find someone who at least knows enough to look into this. So once you're registered with these jurisdictions, then comes the fun task of maintaining these registrations. And I can't tell you how many times I will look up a client on the Secretary of State website and see that their business has either been involuntarily dissolved, because they haven't maintained their registrations, or they're, they're out of compliance, because they just haven't filed now, like a Secretary of State file annual report filing is typically an annual filing. So why they call an annual report. And unfortunately, you know, some CPAs won't do those filings. It's not like a true tax filing. Some people have attorneys do it. A lot of times, what happens, unfortunately, is, you know, one person thinks that the other party is handling it, and that party thinks that the other party is handling it, and it falls through the cracks...
Cal Wilder:These are legal filings. So it'd be nice if you had an attorney do it to make sure it got done, right. But people just kind of want the CPA to do it as part of the annual tax return sometimes, right? Or they want a CFO advisor to do it, but it's nobody's full time job to manage state registration. So you're right, they can fall through the cracks,
Greg Reed:It can fall through the cracks. And unless you're a big company that has someone more or less dedicated to this process, then, you know, it can be something that you just don't think about. So it's something that we do do here at Smart books. We also use or recommend, you know, third parties to manage these filing requirements. I use it personally, for my own business, to manage these filing requirements. I get an email once a year, mines actually this month in August, they've emailed me several times now. Basically saying, hey, we need to make this filing. Here's the amount do they make it very easy, and you just don't forget about it. But again, it is a a task that we created within our organization at SmartBox. To help clients manage.
Cal Wilder:Yeah, and part of managing is de-registering if and when you no longer have nexus in a jurisdiction to and that's, that's equally important. Because once these states get in the habit of receiving tax returns and tax payments from you, and then they stop receiving those tax returns and tax payments. They assume you just have neglected to file and they're happy to mail you a tax assessment for however much money they would estimate you owe them. Yeah, we are going to deal with that.
Greg Reed:So all those things that we talked about on you know, getting set up, you also have to deregister and oftentimes, telling them that you no longer want to pay them can be more difficult than actually signing up. They actually what I found is as the states develop more technology and get a little bit more tech savvy, they make the registration process a little bit more. A little bit easier to navigate, but the DEA registration process can be somewhat of a nightmare. All
Cal Wilder:All right. So one of the first tax types you mentioned that impacts, you know, aside from, you know, annual income or excise or franchise taxes, that impacts businesses very frequently, it's probably sales tax, right? Sales tax payroll tax franchise-like tax, pretty universal, unless you're in a pure niche industry that does not have any sales tax requirements and in any of its jurisdictions, but what's involved with sales tax these days?
Greg Reed:Yeah, sales tax. So a few years ago, when the Wayfair decision passed, basically, to give you a quick recap on that, your your grandfather's company in 1985, that would ship or maybe that's a little early, but whatever the company's before the wayfarer decision that would potentially just ship goods to another state customer in another state. Once it touched the UPS truck, it was no longer there. Their issue, the states had no idea you know how to manage this process. And the wayfarer decision changed that and basically said that, if you have sales to a specific state, then you are potentially subject to, to sales tax. And that created a massive filing requirement for businesses across the board. And to the point where a lot of businesses didn't realize that they had this filing requirement. For the longest time, you know, if you were Massachusetts based business, you had no other connection outside of that other than maybe the occasional mail order that you delivered or that you had a third party deliver, then you would just violate your Massachusetts sales tax in Massachusetts, because that's where you had Nexus. But then all of a sudden, Wayfarer passes you might have you might have a sales tax nexus in multiple states. We actually had a client a few years ago, who we did a sales tax nexus study for. And we found out that they were doing just that they were filing in just Massachusetts, all those sales that were going to other states, they were, in essence, just ignoring. We figured out that they were in 21. Other they had Nexus and 21 other states, they hadn't filed for three to four years. And because they haven't filed, the statute of limitations never started. And they essentially had to go back and pay all those back taxes, we were talking upwards to around$100,000 in back taxes, that does not include the penalties and interest that the states are legally allowed to charge you for. The so I guess now that I've sufficiently scared everyone we should talk about you know, how can we make sure that these issues, okay, maybe they have arisen? How do we mitigate them? What do we do to get back into compliance? And, you know, how do you how do you move forward from this? Because eventually the states will catch up to you. Like I said earlier, states are starting to get smarter, they are dealing they are sharing information with other departments within their states, other states. And eventually they will find you because all the states are hurting for money right now. And they they know where to get it. They just have to figure out how to make that happen, and then the floodgates will open.
Cal Wilder:So this could ensnare businesses that might not really think they have sales tax requirements, right? In traditionally you sold a physical product and you sold a decent volume of it into a state you kind of knew you probably had some sales tax liability because if you're selling widgets, their products and just about everybody taxes products, but right there services that are subject to tax. There's products that get sold like a service that are taxed. So how do you go about figuring out what is really taxable where you're operating?
Greg Reed:Like you said, physical goods are typically subject to some form of sales tax. That's, that's pretty easy. Some industries have different tax rates than other industries, depending on the state that you're in. Some, some states will provide either sales tax credits or reduced rates based on the industry you're in. But the big thing that I find with clients is if they sell a physical, so you sell a physical product, but also a service component with that, so say, instantly, you know, you up, let's just take a plumber, they, you know, will sell you a pipe, but then they also install it. You would say, Okay, well, the pipe is subject to sales tax, but the installation is not depending how that plumber puts that on his or her invoice. The service component that could be subject to sales tax. So if you want to be saved, then you would have to break out the service piece and the materials piece on your invoice. And again, that's an example. None of this is is like all inclusive. This is why again, I think it's sales tax is just one of those things where you really need to have someone in your corner who understands these laws.
Cal Wilder:You could go to your tax CPA, your generalist CPA, but these are really very specialized questions if we're operating outside of the home state that the CPA typically practices in. I know, we've had clients that we referred specialist firms whose primary practice area is sales and use tax to do a, you know, a large study to figure out what the actual compliance requirements are. So first step is probably your your regular tax preparer. But the second step might be finding a specialist.
Greg Reed:Yeah, and again, it depends on the size of your business. Yeah, you could go find a specialist, if you engaged with a larger firm, a lot of you know, big firms, national firms have salt tax divisions, you're also going to pay for that service. So if you're a small business owner, and you think that you might have some, some sales tax filing requirements, then your CPA is a great place to start because that person should have a general knowledge of sales tax, and they can do the research and know how to do the research. I mean, there's 12,000 US sales tax jurisdictions in the United States. You know, it's not just the 50 states, there's counties, cities, towns, and so you need to know no one's going to know all the rules. And we can't expect CPAs to know all the rules, but we do need to know how to find the answers. In what to look for.
Cal Wilder:We've probably talked about sales tax all day, but in the interest of moving on just one more related topic, which is use tax, right where states and jurisdictions expect you to effectively self assess the sales tax that you would have paid if the vendor charged you for sales tax on their invoice. So we're in Massachusetts who has sales tax and of our northern neighbors New Hampshire do not have a sales tax. So we go buy a TV or a computer or a desk in New Hampshire and drive it back to Massachusetts. We didn't pay any sales tax when we bought that in New Hampshire. So we're supposed to self report US tax on that purchase to the state of Massachusetts, right?
Greg Reed:Technically, yes. And that can just again be a tricky thing to track.
Cal Wilder:One-off purchases are probably pretty low risk, but where, you know, I've really seen problems happen is More on the internal use product purchases. For example, I was in the IT services industry prior to SmartWorks. And we sold hardware business was reselling hardware, computer hardware and software. So we buy a lot of computers. And this was, you know, before, everybody did everything in the cloud, and we resold a lot of computers and servers and software licensing. And of course, we had to buy computers and software to run our business internally. And we were set up as a tax exempt reseller with the distributors. So we could order computers for internal use Ingram Micr, Dell or whoever the distributor was, was not going to charge sales tax because we had like a reseller account with them. And we had to self assess US tax. Now, some people in our industry chose to save the 5 or 6 or 7% tax on internal purchases. And if you do that for a number of years, and then you're ultimately in your audit, and you're gonna have to pay that tax plus penalties and interest, right, there's just no way around it. If you're in an industry, in certain industries, where you know that the tax agencies know that you have the opportunity to to buy internal-use products without paying sales tax, you know, they're naturally going to want to target those industries, right?
Greg Reed:Yep, absolutely. And you might be saying to yourself, Well, how would they ever find me? Again, I go back to the states are, are getting smarter, and they're hungry for money. And, you know, some states have what they call business, personal property taxes, where they will assess tax on the fixed assets that you own. And if they start looking at those fixed assets, and they start asking for invoices, maybe your receipts. You know, this is this all goes into a database where there's information sharing, and that, you know, that's a local tax, but they could potentially share that with the Department of Revenue, who will send you a bill for, you know, Hey, you didn't you didn't pay your use tax on that. Or they will put the ball in your court and say, Please prove that you paid US tax on that.
Cal Wilder:So moving on, let's talk about more the annual corporate level taxes, there a number of different names and I've seen around, so what what are we looking at for kind of annual corporate taxes?
Greg Reed:Yes, you have a franchise tax, excise tax, income tax-- these terms are often used interchangeably. They're typically based on either like a sales revenue or a net worth. Sometimes they're called in Massachusetts, we call it a sting tax for pass through entities. Because you would say that a pass through entity shouldn't be subject to two additional taxes. But if you if your net worth is, is high enough and surpasses a certain threshold, then Massachusetts will will assess you a tax and they call it a sting tax, because when they do assess that tax, it stinks. Massachusetts also has a minimum tax of $456. Don't ask me where they came up with 456. I have no clue. But that is just a cost of doing business in Massachusetts. A lot of states have these these minimum taxes as well. Some of them are based on revenue. So for New York, for example, they have a kind of a tiered approach based on your total revenue starts at $50 and goes up from there. Like I said, some states just have the minimum tax like Massachusetts this applies generally across the board to s-corps, but partnerships don't have a minimum tax and Massachusetts they don't have to pay anything. But corps do.
Cal Wilder:Usually it's pretty de minimis it might be a pain to deal with. But right we're usually not talking about many thousands of dollars for a pass through entity unless it's a really large entity that has to do with a stinger-type tax, right or a C-corp that tend to have a larger tax...
Greg Reed:They are de minimis, but I keep using Massachusetts, for example, because that's where we're located. But if you go to extend your tax return, and you do your federal extension, and then with your Massachusetts extension, you don't pay that $456, that extension is void. And now you're a late filer. So it's de minimis, but it's very important that it's paid in on a timely basis.
Cal Wilder:Right. Stay out of trouble unless you're in one of those new few states that don't have business income-type tax.
Greg Reed:There are some states that, you know, are a little bit more favorable to do business in business in others. Wyoming is one of them. Nevada, has a what they call a gross receipts tax, but they don't have necessarily like an income tax. So if you maybe have nexus there, but no income, then you're you're exempt from any taxes there. South Dakota, Alaska, and then Florida, obviously, is a is a popular one.
Cal Wilder:But just to be clear, even if you weren't incorporated business in those states, if you're actually operating in another state, you get no benefit from being incorporated in one of those states, right?
Greg Reed:Correct. Yep. As long as you're if if you incorporate in these states, and that's your only presence. That's great. But whichever state you're actually operating in, then you have you have nexus there, because you are there. If you're the sole employee,
Cal Wilder:This comes back to the whole Nexus discussion you had earlier. Right. All right. So moving on, what's the next type of tax need to worry about?
Greg Reed:So I alluded to this earlier with when you're talking about US taxes, but property taxes and real estate taxes, and I think these are common, and I think we all understand them, but again, it's just another form of tax that we have to think about. So these are typically assessed by the county cities or towns. It's the real estate tax is no different than what you would pay on your personal residence. It's just a tax based on commercial real estate. That that you may own. Obviously, if you lease this is not an issue. Some states do tax, like I alluded to earlier, do tax, business personal property. This can be a little bit of a surprise to business owners.
Cal Wilder:It was to me, I'll tell you, my first business. I was like 26,27 years old, we're a couple years into the business. We hired a seasoned controller. I'd never heard of personal property tax. One day, he hadn't asked me there for filing personal property tax returns, I must have given him a blank look. We paid sales tax when we bought the equipment, I had no idea you had to pay ongoing property taxes on desks and filing cabinets and computers.
Greg Reed:Oh, yeah. And the best part is, is the states will or, or the counties or local jurisdictions will send you a bill and just expect you to pay it based on what their record say, Now, that could work in your favor, or it could not work in your favor. So I mean, you do have the ability to, to appeal that and provide the documentation for the, you know, assets that you do have in that state. But it's a very tedious process. And typically, at the end of the day, it's probably not worth it. So unlike other taxes here in the US, you were you basically tell them what you think you owe, they tell you in this case, what what you owe, and it's it's your job to make sure whether that's accurate or not.
Cal Wilder:Okay. All right, moving on. One of the taxes that I find most aggravating to deal with is payroll related taxes. So what are we looking at there, Greg?
Greg Reed:Oh, me and you both. Yeah, payroll taxes are just something that can be they can get you in trouble real fast. You know, as we alluded to earlier, you have unemployment taxes you have withhold owing taxes, you some states have a disability tax, that all these taxes have to be calculated based on your industry, there may be other factors there, based on the number of full time employees, there may be some factors there. There may be some some local taxes that you need to think about as well. You know, it is the business's responsibility to collect and remit a lot, or all of these these taxes, right, even if it's on behalf of the employees, and there's no way to make employees angry, no faster way to make employees angry, if you mess up their withholdings and W twos and, and all that jazz. Because, you know, no, unfortunately, they're expecting that you get this right.
Cal Wilder:And this is one of the taxes they consider, correct me if I'm wrong, trustee-type taxes where they hold the business owners and executives personally liable for any unpaid payroll taxes, right? If the business fails bankruptcy, they can still come after owners and executives if there are unpaid payroll taxes.
Greg Reed:Yeah, exactly. And, and it's a headache for the employees, it's a headache for the businesses. In general, my first or one of my first piece of pieces of advice to growing businesses who are hiring people, especially people in other states, is to find an advisor or a payroll company that is has a good reputation and is well versed in, in, you know, multiple states. Because payroll is just one of those things kind of like sales tax, you can get into a lot of trouble very quickly.
Cal Wilder:And often we've seen when it comes to payroll tax, unlike somebody, you know, over-deducting personal expenses and getting in trouble by trying to save money on income tax; with payroll tax, when people get in trouble businesses get in trouble often it's not intentional, as much as it is a question of just not knowing what to do. And being very complicated, because we've got, you know, multiple jurisdictions, you've got at least two tax agencies typically to file and pay in for unemployment related type insurance and for withholding income, tax type, type taxes, and register, you have different registration numbers, you've got to set all this up within the payroll software, you're not an expert on this, the payroll service unless you get one that's very diligent, and it's really helpful in this area, they just think, Well, you're the, you're the customer, you're the administrator of the system, you're responsible for setting up your own employees and doing add changes, removes and configuring taxes. And if you ask us a question, we might be able to help you but we're just gonna assume you're on top of it. And so if you don't plug in the unemployment tax number for a state or the withholding tax number for the state, the payroll service is just going to run payroll based on how it's set up. And if no withholding taxes paid to that state, you might find out about it six months later, when that state sends you a big tax assessment bill in the mail.
Greg Reed:And now you're six months behind.
Cal Wilder:So the key is managing all these different registrations with the payroll service to make sure that a the taxes are being assessed at payroll time and be those tax returns are being filed and successfully received by the state in the money associated taxes getting paid and applied by the states. So it's kind of a multi step process to try to audit every now and then I'm actually working right.
Greg Reed:Exactly, yeah, it's it's a very tricky situation. Like I said, you can get into trouble really quickly.
Cal Wilder:So in terms of kind of mitigating the risks there, what we've seen is some payroll services make it pretty easy to see copies of the state tax returns and confirmation that they were accepted. And they'll give you a list of payments that were remitted to different tax agencies. So I think of gussto as being one that makes it relatively easy to see copies of these returns and the payment history. And then you can go to state and request your Certificate of Good Standing from the tax agencies and generally make sure that you're staying current but not not all payroll services are as easy to navigate with this. Yeah.
Greg Reed:And you know, as I as I said earlier, this dates are getting better at, at technology and putting some of this information up on portals and keeping it up to date. And so, you know, it's always a good idea to, you know, once you're registered with the state taxing authorities to log in, and, you know, maybe once a month and just, you know, check is, is everything look good? You know, do I have any open balances? You know, it's, it's a little bit of a pain, but it could be five minutes of your day, that saves you a lot of headaches in the future.
Cal Wilder:Yeah, this is something else that like the annual reports can tend to fall through the cracks, if nobody's got it as their primary job responsibility, because the tax CPAs are going to think to do this, or that contractor do this business owners too busy running the business to want to deal with this, the bookkeeper or the accountant doesn't really know much about payroll, because it's so different than accounting and bookkeeping and financial reporting. And small businesses don't have a separate payroll manager who should understand more about this. So it's gonna be challenging, and make sure this doesn't fall through the cracks and just make sure somebody has this on their list of responsibilities.
Greg Reed:Yeah, and if you're only talking to your CPA once a year, you know, when they when they file your taxes, and they start looking at things and maybe asking questions, then, you know, at that point, it might be too, too late. So it's something that I do as I'll do kind of a sanity check on what I you know, based on the on the wage number, and what I know that the withholding rates generally are? Just to make sure, okay, are we in the ballpark? And does this make sense. But, like I said, at that point, it might be too late. Now, I will say, along with sales tax, and some of these payroll taxes. states aren't trying to they understand that business owners aren't necessarily trying to evade taxes intentionally. So they do offer Voluntary Disclosure programs where basically, if you go to the state and say, I messed up, this is you know, how much tax I owe you. They are a little bit easier on you when it comes to penalties and interest.
Cal Wilder:Okay. I'm kind of tired of talking about different tax types. But I know we've got at least a couple more what what's next on the list, Greg?
Greg Reed:So this last one is one that I think, you know, I mentioned it in our last podcast. And I'll mention it again, it is a great way to save money on taxes. So in response to the state and local tax cap on itemized deductions for individuals, basically capping your income, and your income tax and other local taxes, on your itemized deductions at $10,000. Which in a high tax state is could could have lost you, you know, 20-30,000 in a deduction. The states have enacted what they call a pass through entity tax election. So this is, you know, again, every state does a little differently, but it's typically an election that you have to go in and make at the at the state level. And you are essentially paying your individual income tax at the entity level. You pay it throughout the years, if you would any other any other estimated tax payment. And what it does is it puts the tax on the federal income tax return as a deduction, which gives you a deduction on your your personal taxes, if you're passing that that income through.
Cal Wilder:Right, one of the big issues with this one that gave rise to the pass through entity tax. Is the $10,000 annual limit on federal deductibility of local homeowner property taxes.
Greg Reed:Yep. It's your property taxes and your excise taxes on your car or, you know, personal property taxes and your income tax, your state income taxes all those get added up and then capped at $10,000. Most you know, depending on where you live. You might you might hit that cap easily with your just your is your income tax, nevermind real estate taxes or anything.
Cal Wilder:This strikes me is a classic example of complicating the tax code for arguably no, for no good reason...
Greg Reed:I'll tell you what it is. It's a it's a negotiating tactic. And it's been on the chopping block now to be repealed several times. And every time it gets it, again, it's a negotiating tactic it gets pulled off. A lot of a lot of politicians do not like this.
Cal Wilder:I find it a little bit curious. I think it's just an ultimate commentary that no matter how people like to vote, who they like to vote for, Republican, Democrat, nobody wants to pay any higher taxes personally than they have to. I mean, these, these taxes impact people who live in expensive homes who drive expensive cars, who live in expensive cities. And those places tend to vote for policies that increase government spending programs, and you need higher taxes to pay for those programs. But when it comes time for them to actually have to pay those taxes that they support, they lobby hard, and we get this new, complicated tax apparatus in place to try to avoid paying those taxes. And now everybody has to deal with this complicated tax pass through entity tax instead of simply making a policy decision. Do we believe in taxing people who have high high home values and expensive cars more than than others? Yes or no? And so we've just complicated the tax code. But the good news is for you and for CPAs, like you who take a very consultative approach, you've got a lot a lot of job security, helping people plan and manage these taxes.
Greg Reed:Yeah, Massachusetts just enacted the the millionaire's tax, which is an additional 4%, on top of the 5% that we already pay for people who make over a million dollars, again, just just another another level of tax that we have to didn't have to think about at the state and local level. So in addition to the pass through entity tax, some states actually require businesses to withhold for pass through income from non resident shareholders, they also might require that you withhold for payments to vendors. So for out of state vendors, and they do this just to make sure that they're, they're able to, to catch that that tax dollar otherwise, it's a lot harder to to recoup that tax once the money has essentially left the left the state. They know where you are, they don't necessarily know where your vendors or where your, where your owners are. So they do that's a new, that's, I wouldn't say new, but it's the states are starting to really like that, that tax, or that withholding amount. And that's another one that could potentially sneak up on you because without paying that the business itself could be subject to penalties and interest.
Cal Wilder:Okay, are we are we done? Do we have any more taxes we need to talk about?
Greg Reed:That's those, those are the big ones.
Cal Wilder:Okay. So if I'm a small business owner, I operate in one state, I don't worry about too much. I just have to make sure I'm understanding and compliant with the rules of the one state that I operate in and probably live in, which isn't too daunting. But for business owners that operate in multiple states that get a sense for they probably do have some Nexus liabilities that are unaddressed. Where should they start?
Greg Reed:So again, you know, you might think, okay, I don't have any nexus in another state, but you just hired an employee in another state and now, now you have nexus. So, a few things to say about all that. You know, where do you start, you gotta find someone who again, knows how to find the answer and is isn't just looking at you, as you know, just another tax return. You have to work with your CPA to make sure that they're keeping you in compliance. throw, you know, throughout the year as I alluded to earlier, if you're just talking to your CPA once a year to get the taxes filed, that's probably not your, your best bet. You really need to have that open communication. If you hire someone, you know, you know, hey, what are the tax implications? This is exactly why I don't charge people per phone call, I really want to have open communication with my clients, and I don't want them to feel like they're getting charged every time I pick up the phone. I'd rather deal with these issues throughout the year rather than, Oh, by the way, I hired, you know, seven people in several different states this year, this past year. So keep your keep your CPA involved. And, you know, have those conversations, you know, quick email a, are there any tax implications here that I need to think about?
Cal Wilder:Make sense. Before we wrap up here, Greg, is there anything else you want to make sure to mention?
Greg Reed:So, I know we're talking about all these different taxes, and you're probably thinking that you're ready to leave the country, you know, it's not all bad, you do get a credit for a lot of the taxes a lot of these local taxes that you pay, either at the federal level or at the state level. So you're not paying multiple taxes on on the same income generally. We didn't even talk about apportionment today, because that is something that, in my opinion, business owners shouldn't have to worry too much about if they have a good CPA. But apportionment is basically, you know, how do you slice up that income between the states and depending on on what state you're in and what state you're doing business in, you know, if you know the rules, then you can actually, you know, use that to your benefit as a tax saving strategy. So that's just another thing to think about. Maybe bring up to your your CPA is, Hey, how are how are we handling the apportionment? But now otherwise, you know, final, final piece of advice is, again, just find someone who you trust that is well versed in these issues to keep you out of trouble.
Cal Wilder:Well, thank you, Greg. I know this isn't the most exciting topic, but I really believe if we can help audience members stay out of trouble and avoid having to spend all the time and stress and cost associated with resolving compliance problems that that is, that's a big win. I mean, that's part of running healthy businesses. So I really appreciate your time. Greg, if you want to follow up with you, where can they reach you?
Greg Reed:So the best place to reach me, go to our website, SmartBooksTax.com. You can make an appointment with me right there witgh direct access to my calendar. And we can at least chat through some of these questions and see if there's anything that we can do to help you or save you some more money on taxes.
Cal Wilder:Thanks Greg. We'll talk soon.
Greg Reed:All right. Thanks for having me.
Cal Wilder:Reference show notes and find other episodes on EmpoweringHealthyBusiness.com. If you would like to have a one-on-one discussion with me, or possibly engage SmartBooks to help with your business, you can reach me at Cal@EmpoweringHealthyBusiness.com or message me on LinkedIn where I am easy to find. Until next time, this is Empowering Healthy Business, the podcast for small business owners, signing off.
