One of the key components that investors and entrepreneurs look for before choosing a location to start their business is how friendly the state is when it comes to taxation.
For example, sales tax rates are an important component of business friendliness, because low or no sales taxes encourage consumer purchases, especially when compared with neighboring states. A good example of this illustration is Delaware because Delaware has no sales tax so it attracts buyers from all over the Mid-Atlantic region.
Most investors and entrepreneurs generally shy away from states that impose excise taxes on specific goods or activities, like cigarettes, alcoholic beverages, soda, gasoline, and amusement activities. To attract investors to a state, many states made changes to their income taxes in 2021, with 11 states lowering their income tax rates, 10 cutting individual income tax rates, and five reducing corporate income tax rates.
Five states – Arizona, Idaho, Iowa, Montana, and Ohio—changed their income tax brackets, reducing the number of brackets to create a more neutral structure. Arizona, Idaho, Louisiana, Ohio, and Oklahoma reduced their marginal income tax rates.
10 Best States to Start a Business for Tax Purposes
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Wyoming is at the top of our list of the best states to start a business for tax purposes. This is because Wyoming does not have an individual income tax. Wyoming also does not have a corporate income tax. Wyoming has a 4.00 percent state sales tax, a max local sales tax rate of 2.00 percent, and an average combined state and local sales tax rate of 5.22 percent.
In addition to that, another good reason why an investor should consider investing in Wyoming is that, according to the 2012 United States Bureau of Economic Analysis report, Wyoming’s gross state product was $38.4 billion.
Another state where you can locate your business if you want to take advantage of lower business tax is South Dakota. South Dakota does not have an individual income tax or corporate income tax. It has a 4.50 percent state sales tax rate, a max local sales tax rate of 4.50 percent, and an average combined state and local sales tax rate of 6.40 percent.
The state of South Dakota has a relatively simple property tax system. Tax rates, set by local government bodies such as municipalities and school districts, are applied to the full market value of the residential property. Across the state, the average effective property tax rate is 1.22 percent.
If you are looking for a tax-friendly state to start a business, then you should consider Alaska. Alaska levies no individual income tax or state-level sales tax. Alaska offers the lowest total tax burden of any state, costing taxpayers an average of 5.16 percent of their income.
That breaks down to an average of 3.71 percent of income going to property taxes (the 12th highest in the U.S.), 0 percent in income taxes, and 1.45 percent of income going to excise taxes. To finance state government operations, Alaska depends primarily on petroleum revenues and federal subsidies.
This allows it to have the lowest individual tax burden in the United States. It is one of five states with no state sales tax, and one of seven states that do not levy an individual income tax. This is indeed a good reason why an investor should consider investing in Alaska.
Another state where you can locate your business if you want to take advantage of lower business tax is Florida. This is because Florida has a 5.50 percent corporate income tax. Florida has a 6.00 percent state sales tax rate, a max local sales tax rate of 2.00 percent, and an average combined state and local sales tax rate of 7.01 percent.
Florida’s tax system ranks 4th overall on the 2022 State Business Tax Climate Index. In 1924, they passed an amendment to the Florida constitution that prevents the state from collecting income tax. Article IX, Section 11 states:
No tax upon inheritances or the income of residents or citizens of this state shall be levied by the State of Florida, or under its authority. Aside from tax friendliness, another major reason why an investor should consider investing in Florida is the fact that the economy ranks among the largest in the world.
As of 2018, the gross state product (GSP) is about $1.0 trillion, the fourth-largest economy in the United States. Florida is responsible for 5.0 percent of the United States’ approximate $20.9 trillion gross domestic product (GDP). As of 2018, Florida’s nominal GDP is larger than all but 15 countries.
Montana is yet another state that is highly suitable if you want to state a business for tax advantages. This is so because Montana has a graduated individual income tax, with rates ranging from 1.00 percent to 6.75 percent. Montana has a 6.75 percent corporate income tax rate. Montana does not have a state sales tax and does not levy local sales taxes.
Montana’s tax system ranks 5th overall on the 2022 State Business Tax Climate Index. The state does have a personal income tax, with rates ranging from 1 percent to 6.9 percent. Please note that only a few counties enforce a local state tax on the sale of cars, which is why Montana’s average combined sales tax rate is only 0.002 percent.
Another state where an investor should consider starting a business for a tax benefit is New Hampshire. This is so because New Hampshire has a flat 5.00 percent individual income tax rate levied only on interest and dividends income.
New Hampshire also has a 7.60 percent corporate income tax rate. New Hampshire does not have a state sales tax and does not levy local sales taxes. New Hampshire has one of the lowest tax burdens at 8.7 percent of personal income (49th highest).
Nevada is yet another state that is highly suitable if you want to state a business for tax advantages. This is because Nevada does not have individual income tax and corporate income tax but does levy a gross receipts tax. Nevada has a 6.85 percent state sales tax rate, a max local sales tax rate of 1.53 percent, and an average combined state and local sales tax rate of 8.23 percent.
Even though tourists visit Nevada to gamble, residents pay no personal income tax, and the state offers no corporate tax, no franchise tax, and no inventory tax. The Silver State does have a 6.85% sales tax, and also collects fees, most of them related to those casinos the tourists flock to.
If you are looking for a tax-friendly state to start a business, then you should consider Tennessee. This is because Tennessee does not have an individual income tax. Tennessee has a 6.50 percent corporate income tax rate and levies a gross receipts tax. Tennessee has a 7.00 percent state sales tax rate, a max local sales tax rate of 2.75 percent, and an average combined state and local sales tax rate of 9.55 percent.
Tennessee eliminated its tax on interest and dividend income in 2021 and made other changes favorable to pass-through businesses. The state jumped from 17th to 8th place in the rankings. Tennessee is one of a handful of states with no income tax. There are also no estate or inheritance taxes in Tennessee.
Another state where an investor should consider starting a business for a tax benefit is Indiana. This is so because Indiana has a flat 3.23 percent individual income tax rate. There also are jurisdictions that collect local income taxes. Indiana has a 4.90 percent corporate income tax rate.
Indiana has a 7.00 percent state sales tax rate and does not levy any local sales taxes. The implication is that all Indiana residents pay the same percentage of their income in state taxes. Unlike the federal income tax system, rates do not vary based on income level.
Please note that Indiana levies all the major types of taxes, but it has low rates on broad bases. In 2016, Indiana was home to seven Fortune 500 companies with a combined $142.5 billion in revenue due to their tax-friendliness to businesses.
Lastly, another state where an investor should consider starting a business to enjoy tax benefits is Utah. This is so because Utah has a flat 4.95 percent individual income tax rate. Utah also has a 4.95 percent corporate income tax. Utah has a 6.10 percent state sales tax rate, a max local sales tax rate of 2.95 percent, and an average combined state and local sales tax rate of 7.19 percent.
Utah’s state and local government tax and burden ranked 30th highest in the U.S. and below the national average during Fiscal Year (FY) 2017, according to the Utah Taxpayers Association’s annual calculations in the How Utah Compares report.
It is important to state that the absence of a major tax is a common factor that made all the states listed above make it to the best tax-friendly state to start a business. Nevada, South Dakota, and Wyoming have no corporate or individual income tax (though Nevada imposes gross receipts taxes); Alaska has no individual income or state-level sales tax; Florida has no individual income tax, and New Hampshire and Montana have no sales tax.