As 2025 approaches, businesses and individuals must navigate a range of state and local tax (SALT) considerations that could significantly impact their tax strategies. With increasing scrutiny on remote work, e-commerce, and evolving tax policies, tax planning has become more complex. Below is an overview of key tax planning areas to focus on as you prepare for the year ahead.
1. Pass-Through Entity Tax (PTET) Considerations
More than 35 states offer PTET elections, which allow business owners to pay certain state taxes at the entity level, thereby sidestepping the $10,000 federal limit on state and local tax deductions. This option can be particularly advantageous for owners of pass-through businesses, like S-corporations and partnerships.
– Action Required: Before making a PTET election, ensure that your state of residency offers a credit for PTET paid to another state. Additionally, California and Illinois, among others, have PTET provisions set to expire on December 31, 2025. If you are in California, ensure your business pays the second PTET installment by December 31, 2024.
– Recommendation: Given the upcoming sunset dates for PTET provisions in certain states, evaluate whether making a PTET election is beneficial for your business in 2025.
2. Residency Planning
High-net-worth individuals with substantial capital gains, such as those from the sale of business interests or other liquidity events, may explore establishing residency in a state with a lower tax burden. States like California and New York are particularly aggressive in conducting residency audits and taxing worldwide income.
– Action Required: If considering a move, begin planning well in advance as residency cannot be established overnight. To avoid penalties, ensure your Q4 estimated tax payments meet safe harbor provisions.
– Recommendation: Consult with a tax advisor to assess residency and non-residency status across multiple states to ensure compliance with tax obligations.
3. Nexus and E-Commerce Considerations
With the rise of remote work and online businesses, states are closely examining nexus requirements—whether a business has enough of a presence in a state to be subject to that state’s tax laws.
– Sales Tax Nexus: Many states now require businesses to collect sales tax if they meet certain thresholds, such as $100,000 in sales or 200 transactions within the state. There is also growing regulation on digital goods and services, which may now be subject to sales tax.
– Income Tax Nexus: Nexus rules for income taxes can vary significantly by state and industry. Businesses should review how income is sourced across states, as these rules can be based on either the cost of performance or market-based methods. States may offer protections under laws like Public Law 86-272, which limits income tax liability for businesses with minimal activities in a state.
– Action Required: Annual nexus evaluations are essential, particularly for businesses undergoing mergers and acquisitions, as these activities can alter filing requirements and tax liabilities.
– Recommendation: Conduct a multistate nexus review to identify tax-saving opportunities and ensure compliance.
4. Gross Receipts Taxes
Certain states, including Delaware, Nevada, Texas, and Washington, impose gross receipts taxes. These taxes apply to a business’s total revenue rather than its profits, meaning businesses may be taxed even if they are not profitable.
– Action Required: Businesses should assess whether they meet the sales thresholds for gross receipts taxes in these states.
– Recommendation: Consider the impact of gross receipts taxes when expanding into new states and strategically plan to meet or avoid these thresholds.
5. State and Local Tax Credits and Incentives
Many states offer tax credits and incentives aimed at fostering business growth. These incentives can be particularly beneficial for businesses engaged in hiring, employee training, or capital investment. Businesses planning expansions can take advantage of these programs to reduce tax liabilities.
– Action Required: Explore available tax credits related to hiring and capital investment, particularly when considering business expansion.
– Recommendation: Align your business growth strategy with available state and local tax credits to maximize cash flow and reduce liabilities.
6. Planning for Audit Risks
With increasing enforcement of tax audits, it is essential to understand the common triggers for audits and maintain proper documentation to support all positions taken on tax returns. As state and local tax authorities become more focused on ensuring compliance, businesses should ensure that all filings are accurate and fully substantiated.
– Action Required: Review your tax filings for compliance and audit risks. Be prepared with documentation to support all deductions and positions.
– Recommendation: Stay informed about emerging audit trends and consider working with a tax advisor to conduct an internal review of your tax filings.
Looking Ahead to 2025 and Beyond
As states continue to adjust their tax policies in response to shifting economic conditions and budgetary needs, businesses and individuals must stay informed and proactive. From navigating nexus requirements to taking advantage of state incentives, comprehensive tax planning is critical for optimizing tax positions and minimizing liabilities.
– Action Required: Keep up with changes in state tax laws and evaluate how these laws will affect your tax planning for 2025. Make strategic adjustments as necessary to capitalize on credits, deductions, and favorable tax provisions.
For further guidance on managing state and local tax obligations, it is advisable to consult with a tax professional who can help tailor your strategy to the specific needs of your business or personal financial situation.