Small-Business Tax Obligations

by Karen Stern

As a small-business owner, understanding your various tax obligations is important for running your business. For example, if you’re doing business in several states, you should be aware that your business may be obligated to pay income and/or franchise taxes in those states. Here are some points you should be aware of in regard to income and franchise tax obligations:

Which business activities can create income/franchise tax nexus? Nexus laws can be quite complex and will vary by state. The following types of activities may create income and/or franchise tax nexus in a state: property, employees, intangibles/trademarks, independent contractors/agents, affiliates and customers.

Beware of nexus questionnaires. If a state has any reason to suspect that a company may have nexus, the state will likely send out a nexus questionnaire. It is important to understand the implications of each response when completing it.  

Does the protection provided under Public Law 86-272 apply to my business? It is important to understand the types of businesses, activities and tax types that are afforded protection under PL 86-272. Under PL 86-272, states may not impose a tax based on income on out-of-state taxpayers whose only connection with the state is solicitation of orders for sales of tangible personal property when such orders are approved and shipped from outside the state.  

What are my income/franchise tax obligations? The tax obligations will vary by state based on entity structure and tax type, i.e., entity-level taxes, nonresident withholding or composite tax.

If prior year nexus did exist, what are my options? It is important to understand next steps in identifying the pros/cons of the various options available, i.e., quantify prior-year exposure, consider statute of limitations issues, amnesty programs or voluntary disclosure agreements. n

Karen Stern (314-983-1204 or kstern@bswllc.com) is partner in charge of BSW Small Business Services, which provides small business tax and accounting services.