These 10 states offer the best tax rates for small businesses

Dive Brief:

  • With no corporate or personal income taxes, Nevada ranks as the most tax-friendly state for small business in 2023, according to a study from SimplifyLLC, a publication for small business owners.
  • About 11.2% of state governments’ income on average came from state and local taxes in 2022, the highest share in decades. That’s driving 16% of small businesses, including specialty contractors, subcontractors and most home builders, to increasingly worry about the impact taxes have on their businesses’ bottom lines, according to the study.
  • Higher taxes not only hinder the ability of fledgling construction firms to succeed, but also hurt states’ overall economies by stifling innovation, according to the National Bureau of Economic Research.

Dive Insight:

High taxes, whether corporate or on an individual owner, reduce a company’s cash flow. 

For the construction industry, that means less capital available for expansion, equipment purchases, new hires, bids or debt. That’s why construction businesses should seek tax-friendly locations beyond states with simply no corporate tax, as a bevy of other taxes could impact the bottom line, according to SimplifyLLC. 

Using 2023 data from the U.S. Department of Labor, Tax Foundation and the Federation of Tax Administrators, the five key tax categories, according to the study, include: 

  • Corporate taxes.
  • Personal income taxes.
  • Sales taxes.
  • Property taxes.
  • Unemployment taxes.

There are multiple reasons why these are important. For example, personal income taxes affect take-home pay for workers. A high sales tax means a competitor could charge less for the same product just over the county line. And property taxes increase overhead costs, while unemployment taxes translate to higher labor costs.

States with no or low personal and corporate income taxes usually rank as the most tax-friendly for small businesses in the report, even when they have higher property taxes, according to the analysis. For example, none of the top five states in the ranking have personal or corporate taxes.

Here are the 10 states with the most favorable small business tax rates:

  1. Nevada.
  2. South Dakota.
  3. Washington.
  4. Wyoming.
  5. Texas.
  6. North Carolina.
  7. Florida.
  8. Missouri.
  9. Ohio.
  10. Alabama.

On the other end of the spectrum, the worst-scoring states tend to have high taxes across the board. For example, California has the highest personal income tax rate in the U.S., while Minnesota has the highest corporate rate.

Here are the worst 10 states, including Washington, D.C., regarding small business tax rates:

  1. New Jersey.
  2. Washington, D.C.
  3. Minnesota.
  4. California.
  5. Massachusetts.
  6. New York.
  7. Vermont.
  8. Connecticut.
  9. Rhode Island.
  10. Illinois.

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