The Best and Worst States for Taxes

The state of the economy has small businesses increasingly worried about taxes -- 16% say taxes are their top problem, up from 11% one year ago. Owning a small business is part of the American dream but taxes vary widely by state. In 2022, the average state and local tax burden of 11.2% was the highest it has been in decades, leading many companies to relocate to tax-friendlier locations.

Simplify LLC today released a study on the Best States for Small Business Taxes using 2023 data from the U.S. Department of Labor, Tax Foundation, and Federation of Tax Administrators.

On average across the states, 11.2% of state income came from state and local taxes in 2022, the highest tax burden in decades. In addition, federal tax rate can range from 10% to 37%.

Five tax categories affecting small businesses were analyzed, including corporate tax (45), personal income tax (51), property tax (37), sales tax (51) and unemployment tax (21).

The 10 best states for small business taxes are Nevada, South Dakota, Washington, Wyoming, Texas, North Carolina, Florida, Missouri, Ohio, and Alabama. None of the top five had corporate or personal income tax, so what sets them apart from one another are their tax burdens across property, unemployment and sales. 

The worst places for small business taxes are New Jersey, the District of Columbia, Minnesota, California and Massachusetts. California has the highest personal income tax rate in the U.S. at 12.3%, while Minnesota has the highest corporate rate at 9.8%. Per capita property taxes are higher in the District of Columbia than anywhere else, followed by New Jersey.

Along with access to the study, Simplify LLC offers three tips for lowering your business taxes:

1. Structure Your Business Wisely

Forming a sole proprietorship, LLC or corporation have various tax implications. Choose the structure that aligns with your business goals. 

2. Take Advantage of Deductions and Credits

Common deducations include expenses related to business operations, such as supplies, travel, equipment and office spaces. Consult a local expert.

3. Invest in Tax-Advantaged Accounts

Contribute to tax-advantaged retirement accounts, like a 401(k) or IRA to reduce your overall tax liability. 

4. Consider Depreciation and Amortization

Depreciation and amortization allow you to deduct the cost of certain assets over time. This can include things like equipment, machinery and real estate. Different tax rules apply for different assets, so consult a tax professional to determine the best way to take advantage of these deducations. 

5. Hire a Qualified Tax Professional

A good accountant can help you identify opportunities for deductions, credits, and tax-saving strategies that you might not be aware of. A professional can also ensure that you're in compliance with tax laws and regulations.