Sales growth in sales and expansion into new markets are good problems to have, but they come with their own set of tax challenges. With success comes the need to effectively address a wide range of tax issues. Here are four to keep in mind.
1. LOCATION, LOCATION, LOCATION
Success often means pursuing growth outside your original operational footprint. Once you start crossing borders, your tax challenges multiply. Setting up facilities in a new state will mean new state income tax compliance issues and planning opportunities.
Physical presence issues aren’t necessarily straightforward. How sales are made, where they are concluded, how products are delivered— these and other issues can affect whether you have nexus in a state for income tax purposes.
Registering to do business in a state is primarily a legal decision, but will also trigger tax obligations, so your tax team should be included in that decision. Increasingly, selling in a state may mean exposure to new taxes. In California, for example, if you exceed a certain sales volume, you could face a state franchise tax. Many cities and towns also have their own tax regimes.
Of course, if you expand overseas, things are more complex as issues like transfer pricing come into play. The base erosion and profit shifting (BEPS) project being undertaken by the Organisation for Economic Co-operation and Development and the Group of 20 (G-20) is driving the most significant changes to international taxes in decades.
2. COST SEGREGATION FOR NEW FACILITIES
Whether you’re expanding an existing facility or building a new one, effective cost segregation can help you significantly accelerate depreciation, which can provide a healthy bump to your cash flow. Capital expenditures categorized as building are depreciated over 39 years with very limited bonus depreciation opportunities, while expenditures categorized as land improvements are depreciated over 15 years, and equipment costs are depreciated over five years. Both land improvements, qualified improvement property, and equipment costs have bonus depreciation opportunities.
And while accelerating depreciation is the usual choice, it isn’t always right. It depends on a number of factors, including your forecasted taxable income. Weigh your options against your projected financial performance to make the right choice for your company.
3. CREDITS AND INCENTIVES
States, cities and other taxing jurisdictions don’t just collect revenue, they compete for business. And they offer a wide variety of credit and incentive programs to attract those businesses. From property and sales tax relief to training grants and other programs, there is a good chance you could qualify for some form of tax relief as you consider where to establish operations. Some programs are statutory. But businesses can also often negotiate a customized incentive tailored to their needs and circumstances.