When preparing for year-end tax planning, what should businesses and individuals know about navigating state and local taxes (SALT)? 

GHJ’s Tax Practice has developed a comprehensive 2024 Year-End Tax Guide to help businesses and individuals navigate key tax considerations before closing out the year. Each installment in this series addresses critical topics that will help taxpayers plan proactively.

Pass-Through Entity Tax (PTET) elections, residency planning and nexus considerations are important areas to consider during tax planning as e-commerce and remote work have brought on increased scrutiny. There are several notable opportunities to leverage state and local tax credits and incentives while addressing evolving tax policies that may impact planning for 2025 and beyond.

 

PASS-THROUGH ENTITY TAX (PTET) CONSIDERATIONS

More than 35 states currently offer PTET elections. Business owners who receive passthrough business income can elect to pay certain state taxes on their business income at the entity level, thereby avoiding the $10,000 federal deductibility limit. Before making a PTET election in a nonresident state, carefully evaluate whether the resident state offers credit for PTET paid in a nonresident state.

PTET elections for S-Corporations can be disadvantageous if electing shareholders are both CA residents and nonresidents since the PTET would be allocated in a pro-rata share.

Notable Timing:

  • The PTET provisions in California and Illinois and select other states are due to sunset on Dec. 31, 2025. 
  • California taxpayers who elected the PTET should ensure that the passthrough business pays the second installment for PTET by Dec. 31, 2024.

RECOMMENDED ACTION: These upcoming deadlines introduce uncertainty into future tax planning and strategies. Consider whether PTET elections should be made for your business in the upcoming calendar year.

 

RESIDENCY PLANNING

Some individuals — especially high net worth individuals with expected capital gains from the sale of an interest in a business entity or income from other liquidity events — may consider establishing residency in a lower tax jurisdiction. Certain states such as California and New York are aggressive in residency audits and impose taxes on worldwide income. To ensure compliance and avoid penalties, individuals and businesses should conduct a multistate assessment of residency and nonresidency status to ensure that Q4 estimated tax payments meet safe harbor provisions.

It is important to note that residency cannot be established overnight; it requires careful planning and deliberate steps well in advance. 

RECOMMENDED ACTION: Ensure that Q4 estimated tax payments are made to meet safe harbor provisions and avoid penalties. 

 

NEXUS

With the rise of e-commerce and telecommuting, states are placing increased scrutiny on businesses with remote workers. 

  • Sales Tax Nexus: Many states now require businesses to collect sales tax if thresholds such as $100K in sales or 200 transactions in the state are met. Additionally, states are slowly releasing guidance on digital goods and services, both of which are increasingly subject to sales tax. Ensure this guidance is reviewed if applicable to one’s business.
  • Income Tax Nexus requirements can vary by state and industry. To ensure compliance and optimize tax positions, businesses should:
  • Review how income is sourced to states and explore opportunities to adjust apportionment to more favorable jurisdictions. This is especially relevant as sourcing rules may vary by state and can be based on cost of performance or market-based methods. Conducting a multistate sourcing analysis can uncover significant tax-saving opportunities.
  • Make note of special elections available to qualifying taxpayers, including protections under PL 86-272. These protections can shield businesses with limited activities from income tax nexus in certain states.
  • Be aware that telecommuting employees may create nexus in the state where they work unless the business is protected under PL 86-272. 

The Multistate Tax Commission (MTC) has released guidance on PL 86-272 protections regarding internet activities. New Jersey and New York have adopted this guidance into their state regulations. 

RECOMMENDED ACTION: Nexus evaluations should be part of an annual review, particularly for businesses undergoing mergers and acquisitions, as these activities can significantly impact state filing requirements.

 

GROSS RECEIPTS TAX

Several states impose gross receipts taxes on businesses, which apply regardless of profitability and may be levied in addition to income and franchise taxes. Delaware, Hawaii, Nevada, New Mexico, Ohio, Oregon, Tennessee, Texas and Washington are among the states that impose gross receipts taxes.

Consider the applicability of taxes in these states by analyzing sales in comparison to gross receipts thresholds.

 

STATE AND LOCAL TAX CREDITS AND INCENTIVES

Tax credits are powerful tools for maximizing cash flow. Many states and localities offer incentives for hiring and training employees and making capital investments. This creates opportunities for businesses to strategically align expansion plans with available benefits.

The tax credits can be a valuable tool for maximizing cash flow. Credits are widely available for hiring, training and capital investment in various state and localities.

Expansion plans should be strategically approached by understanding incentive opportunities in potential new business locations.

 

PLANNING FOR SUCCESS

The last few years have brought an increase in audit enforcement, which requires taxpayers to be more aware of audit triggers in addition to maintaining documentation on all positions taken. 

Looking ahead to 2025, taxpayers should remain vigilant and prepare for changes to state and local tax policies. Businesses should continue to stay informed on new guidance issued by the states and plan proactively as states make efforts to increase their revenue in response to decreases in personal and business tax rates. 

To learn more about how businesses and individuals can ensure state and local tax compliance, please contact GHJ’s State and Local Tax Practice.