Typically considered a “tax-free state,” Nevada has attracted many businesses to set up shop and create a business entity there. In fact, when businesses are looking to incorporate or form an LLC outside of their “home” state, they’ll typically look to either Delaware for its business-friendly law or Nevada for its low filing fees and lack of state income taxes.
However, some of this trend is set to change as a new Nevada commerce tax has been enacted on businesses with Nevada-source income. Attorneys at Fox Rothschild are calling this “a sea change for the Silver State.” The new Nevada commerce tax package was effective July 1, 2015, and earlier this month, a Nevada court threw out a petition to repeal it.
What You Need to Know
Here are some of the key changes included in the new tax package:
1. If your business’s Nevada gross revenue is greater than $4 million, the excess is subject to a tax. The specific rate depends on the industry, with rates ranging from 0.051 percent to 0.331 percent. Click here (PDF) to see the rates for the 26 categories.
2. One of the most important things for small businesses to realize is that even if your Nevada gross revenue is under $4 million, you are still required to file the Commerce Tax Return Form each year.
3. The commerce tax is due within 45 days of the end of the taxable year. This is typically the 12-month period from July 1 to June 30 of the following year. This means that the first commerce tax returns will be due on August 14, 2016 (unless you’re granted an extension).
4. The bill also increases the annual state business license fee for corporations. The fee has more than doubled to $500, up from $200. Note that the annual fee for pass-through entities like LLCs remains unchanged at $200.
You can read comprehensive FAQs (PDF) about the bill from the state’s Dept. of Taxation.
The doubling of the annual license fee for corporations is quite hefty, and will probably cause some entrepreneurs to rethink the popular trend of incorporating in Nevada.
If you’re wondering where to incorporate or form an LLC, here’s the advice I have been giving small business owners for years. And this advice hasn’t changed because of the new Nevada commerce tax policy. If you’re a small business (less than five shareholders), it is generally best to form your business in whatever state you live in or operate your business from.
The bottom line is that you are going to be subject to the tax laws and pay corporation maintenance fees for whatever state you conduct your business in. So if your business is located in California and conducts business there, you can’t escape paying state taxes to California just because you incorporate in Wyoming or South Dakota.
In fact, incorporating in a different state actually subjects you to additional fees and paperwork. Whenever your business is incorporated in one state and conducts business in another state, you will need to register as a foreign entity in the other state. This often means two sets of annual reports (and annual fees).
In short, there’s not much advantage for a small business to incorporate or form an LLC in a different state and it’s not smart to pick your state of incorporation just based on the state’s filing fees and tax rates. Keep it simple and register in your home state.
And, remember, if you conduct business in Nevada, make sure to get your Nevada Commerce Tax Return Form in next summer. That’s true whether your gross revenue exceeds $4 million or not.
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