New Study Reveals Increased State and Local Tax Burden for Businesses: How to Use Strategic Tax Planning to Reduce the Corporate Tax Burden
The recent Council on State Taxation (COST) study yielded a disturbing, yet not surprising observation: the corporate tax burden, particularly at the state and local levels, is real, varied, and increasing. The study examined the state and local taxes paid by businesses in FY2016 and discovered that:
- Businesses paid more than $724.1 billion in state and local taxes, up .9% over FY 2015.
- Local business taxes grew by 3.4%.
- 38.4% of the total collected property tax (which comprises the largest source of state and local business taxes) was up 4.5% over FY 2015.
- Local property tax made up 76.8% of all local taxes paid by businesses.
The COST report further demonstrated that state and local taxes differ in their type and amount. For example, states vary widely in their tax structures, which then have far-reaching implications for businesses that have a presence in more than one state.
Beyond the sheer dollar amount paid to various taxing authorities, this study does not account for the operational costs of collecting or remitting taxes, which will only grow with the potential for tax reform.
Taking a Holistic View of Taxes
According to the COST study, business tax revenue accounted for approximately 44% of all state and local tax revenue in FY2016. This rate has consistently hovered within 1% of 45% since FY2003.
Business taxes comprise a sizeable portion of state and local budgets; they are not likely to be eliminated or significantly reduced, even if proposed changes at the federal level are implemented. While taxes are inevitable, there is very little that companies can do to change the tax laws, but they can control their tax planning efforts by taking a holistic view of their tax obligations, with the intent of reducing their overall tax burden.
Tax law is complex. It's not enough to look at state tax rates, local tax rates, deductions, or write-offs by themselves. You need to look for downstream impacts of Federal taxes at the state level, multistate activities, group filing versus separate state filings, and business changes such as from mergers or acquisitions to determine the overall best course of action to minimize taxes and unexpected impacts to cash flow.
Industry-specific depreciation rules can help minimize tax burden. As an example, solar and wind energy investments for energy companies fall into a “5-year property” category, which qualifies for bonus depreciation in the first year placed in service. More than half the cost of these renewable energy projects could be covered by tax incentives including accelerated depreciation, bonus depreciation, and applied tax credits.
Knowing the tax law is only one part of the equation. Not all states conform to Federal rules. You must also perform what-if analyses to model out potential impacts for select years and various scenarios. It is important to determine the most beneficial tax strategies for your business. Between potential tax reform and the new IRS approach to audits, tax professionals should put holistic tax planning at the top of their priority lists.
Just because state and local corporate tax burdens are increasing doesn’t mean that businesses are powerless. By looking at tax situations holistically, and taking into account the strategic impacts of tax depreciation, state tax, and potential tax reform, companies can reduce their overall tax burden by ensuring corporate tax decisions are beneficial to the bottom line, and in compliance with the latest IRS guidance.
Bloomberg BNA's corporate tax software and fixed assets software solutions enable companies to engage in strategic tax planning, anticipate current and future tax changes, and thereby, take control of their tax situation. By analyzing tax obligations, and modeling out different scenarios, businesses can proactively develop effective corporate tax policies that support and enhance business growth and maximize cash tax.