The rise of remote work and digital business models has made it easier than ever for business owners to consider relocating to tax-friendly states. Whether you prefer Florida’s sunshine, New Hampshire’s outdoor opportunities, or Texas’s barbecue, relocating to a tax-advantaged state can potentially save you hundreds of thousands in taxes over your lifetime. However, what many business owners don’t realize is that changing your business address isn’t as simple as renting an office or updating your website. State tax authorities are increasingly aggressive in their pursuit of tax revenue, and without proper planning, your move could trigger audits, double taxation, and costly surprises that can wipe out any potential savings.
The multi-state tax trap is especially treacherous for business owners because you have two major hurdles running in parallel: establishing your personal domicile in the new state while also relocating your business operations. Here’s what you need to know to make your interstate move a success.
1. Business Income Complications for Interstate Movers
Business ownership creates unique tax considerations when you move across state lines, regardless of whether your business itself is relocating.
What You Need to Know:
- Income from your business will generally be sourced to the state where the business operates, regardless of where you personally live.
- You may need to file tax returns in multiple states: a resident return in your new home state and nonresident returns in states where your business operates.
- Most states provide credits for taxes paid to other states, but these rarely provide perfect relief from double taxation due to differences in tax rates and rules.
- If you’re selling your business or receiving buyout payments, the timing of these transactions relative to your move could significantly impact your tax bill.
Why It Matters: Moving to a low-tax state doesn’t automatically shield all your business income from taxation in other states where your business operates. Understanding these distinctions helps set realistic expectations about the tax benefits of your move.
Pro Tip: Before relocating, work with a tax professional to project your tax liability under different scenarios. This allows you to quantify the actual tax benefits of your move given your specific mix of business and personal income sources.
2. The Business Owner’s Domicile Challenge
As a business owner, establishing a new domicile is more complex than for a W-2 employee because your business ties can create competing evidence about where you truly “live.”
What You Need to Know:
- States determine your domicile based on the concept of “intent to remain permanently,” evaluating factors like where you spend time, spend your money, maintain your primary home, and center your life activities.
- Your continued involvement in business operations in your former state can undermine your claim of a domicile change, even if you’ve physically moved.
- High-tax states like California, New York, and Massachusetts are particularly aggressive in auditing departing business owners and executives (and even retired taxpayers with high income-earning investments).
- Having a continued ownership interest in a business located in your former state doesn’t automatically prevent changing your domicile, but it requires careful planning and documentation.
Why It Matters: Failed domicile changes can lead to continued taxation of your worldwide income by your former state, eliminating the tax benefits of your move and still adding new complexities and compliance costs.
Pro Tip: Create a comprehensive “domicile change plan” with your tax and wealth advisor that addresses both personal and business ties to your former state. Document each step meticulously, including how you’ll manage your business interests from your new location.
Read more about the importance of having a full integrated planning team here:
3. Timing Personal Income and Business Transactions
What You Need to Know:
- Capital gains from selling business interests or investments are generally taxed based on your residency at the time of the sale.
- Deferred compensation and earnouts from prior business sales may remain taxable in your former state even after you’ve relocated.
- Dividend distributions from C-Corporations are typically taxed where you reside when received.
- Retirement account distributions have varying state tax treatment, with some states exempting them entirely.
Why It Matters: Timing certain transactions around your move can create six or seven-figure tax savings. Poor timing can result in maximum taxation at the highest possible rates.
Pro Tip: If you anticipate selling your business or receiving a significant distribution, consider whether completing the transaction before or after establishing your new domicile would be more advantageous. Sometimes delaying a transaction by even a few months can create substantial tax savings once you’ve established domicile in a lower-tax state.
Read more about the ways to save tax on the sale of your business here:
https://southcoastfp.com/5-ways-to-pay-less-taxes-when-selling-your-business/
4. Estate Planning Reset: A Silver Lining
Moving states creates an excellent opportunity to revisit your estate plan, as different states have very different estate tax rules.
What You Need to Know:
- State estate taxes vary significantly, from zero in states like Florida and Nevada to rates exceeding 16% in states like Massachusetts and Washington.
- Estate planning documents like wills, trusts, and powers of attorney need to be updated to comply with your new state’s laws.
- Business succession planning may be impacted by your new state’s rules regarding inheritance, especially for family businesses.
- Some states have inheritance taxes that apply to beneficiaries rather than the estate itself.
Why It Matters: A well-executed move from a high estate tax state to one without estate taxes can save millions of your hard earned wealth as it transitions to the next generation, particularly for business owners whose largest asset is often their business interest.
Pro Tip: Use your relocation as an opportunity for a complete estate planning refresh. Consider whether your business succession plan should be updated to reflect your new state’s laws and tax environment, potentially creating significant long-term tax savings for your family.
Read more about how to ask better questions about your estate planning from our Partners here: https://napierfinancial.com/asking-better-questions-about-estate-planning/
5. The Business Owner’s Relocation Checklist
A successful personal relocation for tax purposes to a new state requires attention to how you manage the transition of your life as a business owner.
Essential Steps:
- Purchase or lease a primary residence in your new state that is comparable or larger than your residence in your former state.
- Sell your residence in your former state or convert it to a true rental property with a property management agreement.
- Update personal documents including driver’s license, voter registration, insurance policies (even a library card!).
- Move banking relationships to your new state, especially for personal accounts and any business accounts where you have signatory authority.
- Update your estate planning documents to comply with your new state’s laws.
- Change your business roles and responsibilities to minimize required physical presence in your former state.
- Document board/member meetings conducted remotely from your new state to establish management from that location.
- Maintain a detailed log of days spent in each state, especially important for business owners who must return to their former state.
- Join community organizations in your new state to establish social ties there (Pickleball counts!).
Pro Tip: Coordinate with your wealth advisor and create a formal relocation timeline with specific milestones and deadlines. Track completion of each item and store documentation securely. This organized approach not only helps ensure you don’t miss critical steps but also creates compelling evidence of your intent if you face a residency audit years later.
Final Thoughts
For business owners, successfully relocating to a lower-tax state requires more comprehensive planning than it does for employees or high-earning retirees. Your business ties create unique complexities that require thoughtful management to avoid undermining your tax goals. Simply buying a home in a new state while maintaining your normal business rhythm in your former state is likely to fail a review by the state tax authorities.
The most successful relocations occur when business owners work with advisors who understand the unique challenges that business ownership creates when changing domicile. This specialized focus allows you to create a relocation plan that respects your ongoing business responsibilities while maximizing personal tax benefits.
Remember that state tax authorities are becoming increasingly sophisticated in their tracking and enforcement efforts, especially with the ability to use AI to review large data sets such as your credit card spending and bank statements. They understand the financial incentives for business owners to relocate, and they’re prepared to challenge moves that appear motivated primarily by tax considerations while business activities remain centered in the original state. Your job is not just to move, but to create a new life that would convince even the most skeptical auditor that your relocation was genuine, substantial, and permanent.
If you’re considering a move to reduce your tax burden, or want to explore the potential upsides of making the move, contact our team of tax specialists before you list your current home for sale. The right planning before your move can mean the difference between substantial tax savings and expensive complications that follow you to your new state.
Learn more about our services for business owners here.
