J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line

State Income Taxes on Business Income

Federal income taxes on your business income may not be your only concern. You may also be subject to state income taxes. This liability depends on whether you do business within the state. Generally, this means having a nexus (connection) to the state. This is based on having a physical presence there, which may be evidenced by maintaining an office or sending a sales force into the state; merely shipping goods into the state without some additional connection is not enough to prove a business presence within the state. You may have a nexus to more than 1 state, no matter how small your business is.

If there is a business connection, the business income is apportioned among the states in which you do business. Apportionment is based on a sales factor, a payroll factor, and a property factor (the states have different apportionment rules). The rules are highly complex, but there is considerable wiggle room to shift income into the state with the lowest taxes.

For more information about state income taxes, contact the tax or revenue departments of each state in which you do business.