Publications

• 30 Second Ideas
• Accounting Updates
• Alerts
• Articles
• Business Surveys
• Construction Edge
• Healthcare Edge
• Insurance Edge
• Legal Talent
• Manufacturing Edge
• Not-for-Profit Edge
• Quick Links & Good Ideas
• SEC Edge
• Strategy Insights Blog
• Surviving the Upturn
• Tax Highlights

Paying Too Much State Tax?

In this tough economic time, states are feeling the pressure just as much as their citizens. Most states are running a deficit and are aggressively looking for new ways to increase revenue to close the budget gap. A way of doing this is by changing the way they tax companies, especially nonresident businesses. In recent years we have seen states such as Texas, Ohio, and Michigan radically changing their business-tax structures and moving away from a “net income” basis of taxation. These changes may require new tracking of revenue, income, or expense that may not be easily obtained from standard financial information.

As a taxpayer it is important to make sure that all deductions are properly being taken. For states like Ohio and Washington, one should properly record returns and discounts by state to insure that only actual income in that state is being taxed. However, in Texas it is important to give detailed descriptions of cost-of-goods-sold accounts. Texas does not accept the federal deduction for cost of goods sold but instead makes the taxpayer recalculate the deduction. Texas has the taxpayer distinguish between direct and indirect cost and does not allow certain expenses normally associated with cost-of-goods-sold cost. Any clarification in the trial balance can allow the time-consuming process to be somewhat streamlined.

In Michigan, any expense for tangible personal property purchased from a third party is a deduction. In order to make sure your tax liability in this state is correct and, more importantly, at its lowest amount, you should make sure that all of this property is properly reflected in the trial balance. A recommendation would be to set up additional accounts that easily identify these expenses. For example, having a repairs-and-maintenance-parts account separate from repairs and maintenance services allows a taxpayer to capture additional deductions that could be sitting in a generic repairs-and-maintenance account. Doing this not only increases the deductions you are able to take but also helps substantiate your return in case of audit.

As demonstrated, properly categorizing expenses can reduce the tax liability, audit adjustments, and time to prepare returns. We recommend that taxpayers periodically sit down and review where they are doing business and what tax-filing requirements they may have. The Blackman Kallick State and Local Group has assisted businesses in reviewing their filing requirements. While filing in additional states may not be pleasant, it certainly beats what could happen if a state asserts that your business hasn’t filed multiple prior-year returns.

For more information or to discuss any concerns regarding state tax issues please contact Jason Parish at jparish@BlackmanKallick.com or 312-980-2959, or your Blackman Kallick representative. Our thanks to Deb Rood for her contribution to this article.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.