Sam Brotman, JD, LLM, MBA May 14, 2021 8 min read

How Does Residency Determine Multi-State Taxes for My Business?

Where you do business has a significant impact on how you are taxed. If your business  has outlets in multiple states or the principals are scattered around the country, then the complexity of your tax situation is tenfold. It is complicated and confusing and we have seen too many cases of businesses that get taxed in other states besides California.

How your business is taxed depends on many factors, such as its nexus. If you own or work for a company that requires its employees to travel frequently on business, you need to be very careful to avoid having your business or your earnings taxed in multiple states.

Dual residency in states outside of California is not exempt from multi-state taxation. This scenario also has its share of complicated tax rules and income tax credits. 

If you live in California for only part of the year, the percentage of tax you pay will be based on how many months during the tax year you reside there. It is not uncommon in California for residents to live in other states and we face this tax situation regularly with our clients.

Careful income tax planning can help you avoid you or your business from being unnecessarily taxed by California and other states, or even worse, be audited on this matter. If you are facing these issues, call me. We can sort out your residency tax issues, whether it is for your business or your residence(s).

How “Residency” is Defined

There is an individual issue related to residency that is important, particularly to officers or owners of companies. As you may know, there are multi-state issues with companies. There are also multi-state issues with people, but in comparison, companies don't move quite as easily or as frequently.

A company’s nexus is going to be where its officers live and where the inventory is stored, their base of operations and where they have incorporated it. However, people move around a lot, so there are situations where residency issues creep up on people who live in different states from where their companies are located or are frequent travelers. 

Residency laws vary from state to state, so it's impossible to cover every single state requirement, but most states are going to take the view that if you lived in a particular state for more than six months out of the year, you are going to be deemed a resident of that state.

Multi-State Tax Credits

If you are a resident of California, then you are going to be taxed on your “worldwide” income. The state is going to seek to tax you, based on the fact that you were a resident in that state. If you live in California six months a year, and if you lived in Texas for five months of the year, then you would be considered a California resident. As a resident, you pay California tax on that income.

However, California will give you credit for any tax paid in another state and then assess you on the balance remaining. In our Texas scenario, since there’s no state income tax, California would not have provided any credit for state income tax paid and would assess state income tax liability on the full amount. In other situations, they would simply credit you for income tax paid in other states and charge you the difference in tax.

Multi-State Residency

From a residency perspective, pay attention to where you are, where you are performing services and where you are subject to tax. There are conflicts with many states with respect to taxation schemes on the corporate side. 

For example, if you are an officer of a company and you do a lot of traveling, you may find it wiser to move your home base to a different state than the one you actually live in. There are also other practical considerations for people with families or children.

You may actually be able to pick up your life and move it from one state to another. It gets really complicated for states that are very close together, particularly Northeastern states where you could cross two or three state lines in a given day. 

From a residency perspective, make sure that you are doing things from a tax-efficiency standpoint. From the compliance angle, check to be sure that you are not subjecting yourself to residency in multiple states. From an officer or a business owner’s point of view, you need to be very careful with this. Although the issues are out there, with good tax planning you can usually mitigate most of them.

Conclusion

If you conduct business in multiple states, you need to be very careful about designating the geographical sources of your income. California has pretty tight rules about what constitutes “income earned in California.” You could be setting yourself up for being taxed by other states as well.

The same concept applies to residency. If you live outside of California for any period of time, then you could be considered a resident of the other state(s) and subject to state income tax. 

If you need assistance in sorting out your residency or nexus tax issues, call us. We specialize in working with small businesses in California who fall into the category of being subject to multi-state taxation. We also work with individuals who have dual residency in other states.  

With proper tax planning, you can minimize your tax burden and avoid being the subject of a residency audit with the state of California. Give me a call and we can review your situation and find solutions.

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Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law

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