Today a client asked me about where to relocate her company headquarters. Her computer engineers aren’t thrilled with the current location, and would like to move to either California or Texas. I explained the decision has a cost difference of $165,000.
Currently, there’s a small office in California with one employee. The business, which is an S-Corporation, is taxed on the personal level (as almost all S-Corporations are). The business is profitable.
California uses a one-factor sales test to determine the percentage of income attributable to the state. Most of the sales of the company are not to California; she only owes a small amount of tax to California based on the income. Her California tax bill today is more of an annoyance than anything else.
However, if the company’s headquarters moved to California, then all sales not attributable to a state the company does business in would be attributable to California. In running an estimate for 2014, that amounts to an additional $170,000 she would owe in California tax.
On the other hand, Texas doesn’t have a state income tax. If the company’s headquarters moves to Dallas, her tax bill won’t change. Her engineers may like the Bronze Golden State slightly more than the Lone Star State; however, my client is a businesswoman who understands math.
This is a true story, and there’s no doubt in my mind that what I told my client has been duplicated by hundreds of accountants throughout the country. Taxes matter, as always.