Taxes, Your Business, and Moving
We’ve talked about the Great Resignation in relation to the changing world of work we’ve seen over the last two years, including some companies moving to a hybrid model. One of the news stories we continue to see is not just people deciding to move because of remote work, but businesses deciding to move for better business and tax conditions. Is it worthwhile to move your business before you exit?
Looking at the Statistics
The low hanging fruit when looking at business relocations is California. The Golden State is losing two $200,000+ income households for every one that comes in (that ratio is inverted for Florida). It’s the poster boy for a larger trend: of the 25 lowest-tax states, 20 enjoyed net in-migration in the last year. Just as individuals have used remote work to make major changes in their lives, so too businesses have chosen to go where they are treated best instead of just where they’ve always been.
The big storylines include tech’s migration to Texas, led by Oracle and HP, as well as Elon Musk’s Tesla and SpaceX, which purportedly saved hundreds of millions in taxes by coming to the Lone Star State.
If a business owner is looking to sell in the next 6-12 months, a move probably doesn’t make any sense. Key employees may not be willing to come and it will take a while to get your business up and running in its new location.
But if you’re a business owner who still has some gas in the tank and is looking to sell 2-3 years in the future, and beyond, there are several reasons why you might be willing to endure the difficulties of a move:
- A better business and social climate — some retail businesses are having to simply close because local law enforcement is not dealing with crime or drug use, blighting what were formerly thriving downtown areas. Policymakers in some states also offer lots of obstacles for businesses to have to jump through in order to stay in business and after the pandemic, some people have had enough. They want their business to grow and thrive now, and moving can be a solution.
- Better options for a liquidity event — lower taxes and a better business climate certainly help entrepreneurs in the present, but when they take their business to market, it will help them as well, as the taxes they pay on the sale may be greatly reduced, giving them more chances to keep the fruits of their labor, or give it away to causes they support.
- Setting up for retirement early — while some business owners had a “sell and move” strategy already, they might opt to invert the process by moving then selling. If they had a place they always wanted to live, and the business can continue to do well there, the owners can reap the benefits of moving to their dream location while running their business. They may then find that same reinvigoration that many remote workers have experienced when given the option to live someplace they’ve always wanted to (and often, at lower prices) and go on to work in the business a few years longer, increasing the valuation of the company while making profits that are taxed at a lower rate in the short-term.
One more cherry on top? Business moving expenses are almost always entirely deductible!
It’s too early to tell precisely what the long-term effects of businesses and wealth creators leaving certain states will be, but it’s unlikely to be anything good. Hopefully that can serve as a wakeup to policymakers, if they’re listening to what people want instead of telling them what they should want.
Thinking about moving your business to another state? We’ve got people who can help you evaluate whether that’s a good financial decision, and we can help forecast the effect on the valuation of your business. Give us a call today.