How do you know if your business needs to file an income tax return for the state? It depends! There are three common situations that might give your business nexus within a state. Each state has their own specific rules so it is important to keep detailed records of what is done in each state to see if any of the activity might give the business a filing requirement.
First is the income test. If a business has revenue coming from a state, it might have a filing requirement for that state. Generally, there are thresholds for income, but some states have no thresholds. The income has to rise above a certain dollar amount as set by the state in order to have a filing requirement. Some states require state tax returns for any level of income earned from the state.
The second test is the employee test. A business might have filing requirements if they have employees in the state. As more businesses switch to remote work, they might find themselves hiring out-of-state workers. This might give them additional nexus in the employee’s home state.
The third common test is the asset test. If a business keeps assets in the state, it might have a filing requirement. This includes assets such as buildings or inventory. A business is considered to be physically present in the state if they keep capital assets in that state.
Most of these requirements determine if a business needs to file an income tax return but there is another return similar to a state income tax return that a business is required to file: a franchise tax return. Texas is one of the states that require a franchise tax return from businesses so that it can tax the revenues earned in the state. California, on the other hand, has both a franchise tax and a corporate income tax.
It is important to research any state that the business might have nexus in to determine their tax obligations. If you would like ADKF’s help in determining your business’ income tax obligations, give us a call at (210) 829-1300 for our assistance.