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The Tax Implications of Doing Business in the U.S.

This post first appeared on the CA4IT Blog, December 7th, 2015

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Because data flows freely across international borders, many IT professionals have developed an international clientele. While doing business internationally can help Canadian companies to grow, smart business owners are keeping an eye on the tax implications of doing business in the U.S. The Canadian Business Journal reports that while most Canadian companies are on top of the federal tax laws that apply to their U.S. business activity, some are unaware of the state and local taxes that can significantly cut into their profits.

According to CFO Magazine, a number of states are becoming aggressive about collecting additional income tax revenues from corporations by asserting economic nexus ­­– a situation in which a business has a sufficient connection with a state to subject it to taxes imposed by that state. A CFO survey found that California and New York are the states that are most aggressively leveraging economic nexus to generate tax revenues, followed by New Jersey, Michigan, and Massachusetts. A number of other states are also actively seeking to collect tax revenue from business from other states and other countries.

Complicating the situation is that each state has its own tax code, which makes for a wide range of state tax bases and rates. And it’s not just states that are looking to maximize their revenues at the expense of non-local companies. Many cities and municipalities have their own rules covering income taxes, gross receipts, and sales taxes.

Income tax accountants recommend that businesses research state and local tax laws before establishing a nexus in an area. Understanding your obligations before you start doing business across the border gives you the best opportunity to reduce your tax liability. If you’re already doing business in the U.S. and haven’t paid state taxes, The Canadian Business Journal recommends that you evaluate the benefits of entering into a voluntary disclosure agreement with the state. A voluntary disclosure could result in a reduction in multi-year back tax liabilities and might reduce the penalties and interest you may owe. A voluntary disclosure could also mitigate potential criminal penalties arising from a failure to file taxes in the U.S. Be sure to consult a tax attorney before making any disclosures to a government agency outside Canada.

Tax liability is a complicated area. If you’re interested in expanding your business into the U.S., or you have already established an American clientele, it would be to your benefit to consult an accounting and bookkeeping service or more ideally a professional accounting firm like CA4IT that specializes in helping IT consulting professionals. Give our experienced CPAs a call today at 800-465-7532 or contact us by email.