The Mark Perlberg CPA Podcast
The Mark Perlberg CPA Podcast
EP 89 - Hidden State Tax Traps Every Business Owner Must Know
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Are you unknowingly falling into these 5 hidden state tax traps that could be costing you thousands? In this video, we break down the most overlooked state tax issues that business owners, real estate investors, and high-income earners often miss—and how you can maximize your tax savings and avoid compliance risks.
Here’s what you’ll learn:
- Why the location of your LLC doesn’t impact state tax obligations (and what actually matters).
- How losses from out-of-state properties might not offset your income where you live.
- The key differences between federal and state K1 income that could lead to costly errors.
- How to leverage state tax credits and pass-through entity tax elections for bigger deductions.
- The importance of timing your major financial moves to avoid high-tax states.
These practical strategies are designed to help you keep more of your hard-earned money, whether you’re navigating complex state tax rules or planning for long-term wealth-building. Don’t let hidden tax traps derail your financial goals—start optimizing today!
💡 Ready to take control of your taxes? Comment "TAX SAVINGS" to get the full episode, and download our free tax planning checklist for actionable insights tailored to your needs. Book your free consultation to explore how we can help you save more!
#smarttaxplanning #limitedliabilitycompany #statetaxtraps #taxsavingsstrategies #highincomeearners
CHAPTERS:
00:00 - Intro
01:16 - LLC Location Strategies
02:45 - State Tax Loss Treatment
05:48 - Cost Segregation Benefits
09:31 - State Tax Credits Overview
11:29 - Timing for State Tax Opportunities
13:58 - 5 Overlooked Tax Strategies
15:16 - Getting Started with Tax Planning
Your tax savings is going to give you all your down payment back. The rest is just profit coming in. It's like you're investing in real estate for free. He was a limited partner, so there was zero risk and he really liked you. This was one of our more risk adverse clients. All right, welcome to the show.
Speaker 1:I always love nerding out with experts in the world of money and finance. With experts in the world of money and finance, here's an area of expertise and tax implications that you're likely not hearing enough of, and one of the reasons why is a lot of people just don't fully understand the topic. So if you're a CPA, listening, get out your pen and paper and take some notes, and if you are a general business owner and entrepreneur, you really want to make sure you're not missing out on understanding this topic, which is state taxes. So what I'm going to explore today are the top five hidden traps that you're missing out on, most likely when it comes to state taxes. Some of these may result in overpayment in taxes, and some of them may create some potential compliance risks. So let's start off with number one. Number one, and this is something that hopefully all you CPAs know, but let's clarify the location of your LLC does not have any impact on what state you pay taxes in. Nice, try thinking that your Nevada LLC is going to help you bypass all of your California taxes Good try. There may be some asset protection purposes associated with it. There may be some asset protection purposes associated with it. However, the location of your LLC does not prevent you from having to file a state tax return for the business activity that took place in that state. To clarify, if you own and operate a business in Georgia and you have an LLC based out of Nevada, you are still going to have to file a Georgia income state tax return. If you operate in California and your LLC is in Texas, you're not going to be having all the advantages of the $0 tax bracket of Texas. You're going to be paying those same California taxes and you're still going to have to register to do business in California. So make sure that the location of your LLC is a decision based more on the concept of either convenience and you have it in the state where it's located, or if you have a specialist to advise on asset protection, but it's not going to save you any taxes. Nice try.
Speaker 1:Next point, point two what we are going to discuss is the value of your losses. The value of your losses may be different at the state level, in the federal level. Let's clarify let's say you have a short-term rental we all love the short-term rental loophole and let's say that you're in a 40% combined federal and state bracket 35 to the federal and 5% to the state. Well, you live in let's say you live in North Carolina, but the short-term rental is in Tennessee. Well, the losses in Tennessee are not going to be able to offset typically will not offset the state taxes of where you live. So if you have losses from another state, the best that you're going to see here is, because you have a negative income statement, you're not going to be paying taxes on that revenue. You still see the advantages in that the depreciation from your rentals will offset the revenue, but the losses will not be able to offset your other sources of income that are not sourced from that state.
Speaker 1:What the states typically do here is they say yes, we're going to factor in. If you're not paying taxes in the state, we're going to move it into our state. But when you have losses from other states, they say we're not going to use these losses. We're only going to look at where you have income where you're not paying taxes in other states that we're going to tax you. So have income where you're not paying taxes in other states that we're going to tax you. So let's say you have some profits in Tennessee or Texas that are not subject to income tax. The state that you live in will most likely want to tax you there, but they're not going to allow you to also create losses in the other states to offset your income of the state of residence. So make sure you pay attention to that in your tax planning and that your accountant has properly assigned those losses and is aware of the state tax treatment of your losses.
Speaker 1:If you're a high income earner, you're probably thinking how do I get started with all these tax savings ideas and who do I talk to? What works for me? Well, there's so much information out there and that's why we boiled this down to the simplest concepts in our tax planning checklist Three simple steps. We have a free guide for you that's going to help you get a high level understanding of what you could possibly be doing to reduce your taxes, whether you're just starting out or you're a high income earner making seven figures in profits. Go to taxplanningchecklistcom or just click the link below. You'll get access to a free mini course with video guidance and other free resources to help you begin understanding what's possible for you in tax planning.
Speaker 1:Okay, let's go to the hidden tax trap. Number three here, and this is another one that I see often missed and many compliance errors, and this has to do with cost segregation and the impact it has on your tax return. The income statement on your federal return is going to be different from your state return because states are not going to conform to bonus depreciation when you do a cost segregation study. I know we threw a lot at you there, so for some of you guys just getting started listening to our content but I imagine if you're interested in this stuff you probably have some background. So let's say we're doing a cost segregation study or any type of instance where we get that bonus depreciation, that beautiful upfront tax deduction whether we have equipment or vehicles, or we do a cost segregation study.
Speaker 1:Well, most states are not going to conform to bonus. They'll give you a little bit of a chunk of that immediate write-off, but then they're going to write off over 5, 7, or 15 years usually. So you're not going to get as much of a tax deduction on the state side. So we go back to this 40% tax deduction. You do a cost seg. The engineer says, hey, great news, we gave you a $100,000 tax deduction. You think to yourself that's going to save me $40,000 in taxes. Well, not so fast. Well, if you're in a 35% federal tax bracket, yes, you'll save $35,000. But on the state side you're not going to take that full $100,000 tax induction up front, because a good chunk of that is going to be broken out over the next five years because the states aren't going to give you as much of a write-off.
Speaker 1:Now here's where we see challenges and risks. And if you're a CPA, listen up, especially when you get these K-1s. A lot of you folks are plugging in the federal income statement and by default it's going to roll into the state tax return. So we're going to see a loss of, let's say, half a million on the federal side and you're going to assume that they have that same amount of state loss hitting the 1040. Well, you are going to hopefully learn from this, or learn the hard way when you get a notice from the IRS, when they're wondering how you created this half a million dollar loss in California for investing in a rental property in Oklahoma. So keep in mind, you're going to see a different income statement, so you're going to get an Oklahoma tax return, in this example, showing a loss typically less than what's on the federal side in year one. So not only that, but then eventually you're going to see capital gains events in the sale of these syndicated real estate investments where you had all these losses that are recaptured and you get this heavy tax burden on the sale.
Speaker 1:Well, make sure you check the state K-1s. They're different. The K-1 income at the state level and the states are likely to show less of a capital gain because you wrote off less from that cost segregation study in many circumstances Not all, but at the very least you want to make sure you are properly reporting the state income, which is going to be different from the federal. Also, what I want you to think about here is in year two, because the states are going to spread out that depreciation a little longer from those cost segs or other bonus depreciation sources. Your income is going to be typically higher in year one on the state side, but lower in the following years. So you want to make sure you're accurately reporting this stuff. Accurately reporting this stuff.
Speaker 1:Let's go to a myth and hidden tax trap number one. Now, this is a hidden tax savings opportunity and we just recommended an amended return for a missed savings opportunity, which is acknowledging the state level tax credits. So we had a client that invested into a syndicated real estate fund and there was a $4,000 Connecticut tax credit. Essentially, what happened was the entity the partnership paid for the taxes upfront and this allows you to get more of a state level tax savings because we have these salt caps where you can only write off $10,000. So they paid it at the partnership level and gave him a credit against his Connecticut taxes. Well, the tax preparer didn't realize that there was a credit that he got through his partnership investment, so he paid the full amount of Connecticut taxes and didn't get the credit for the amount already paid for him on his behalf through the partnership.
Speaker 1:There's another missed opportunity here regarding state taxes and tax credits, which is the pass-through entity tax election. If you have profit through a partnership or S-Corp, you may be able to pay some of those taxes through the entity to deduct more than the 10,000 amount of state taxes state income taxes against your federal taxes. If you have a seasoned preparer and advisor, hopefully they've considered this as one of the strategies to reduce your taxes. If you have someone who's either overworked or he's charging you like a thousand bucks for your S-corp, or he's a little over the hill and never really wanted to bother reading the tax cuts and jobs act, you may be missing out on that opportunity to create more of a tax deduction from your state income taxes. Now, if you're in a state that doesn't charge any state income taxes, this is not going to be an issue for you taxes. This is not going to be an issue for you.
Speaker 1:And number five and here is an opportunity that I want you to explore here for number five, which is timing as it relates to state taxes. So a lot of you have the opportunity to time with timing to decide where, in what state, are you going to pay income taxes. And let me just explain this a little more clearly. So let's say you have the opportunity to time a significant transaction Most common ones. We're considering here 401k distributions or maybe a Roth conversion. When are you going gonna be paying taxes those tax deferred vehicle or from your IRA? Eventually you're gonna be paying taxes on it.
Speaker 1:Or this could be capital gains from your stock portfolio, as another example, where the location of the company where you're investing into the stocks or the location you are where you put the money into your tax deferred vehicles this is one of the instances where the location of the activities is not as important. If you change the location where you live and establish permanent residency in a lower tax state, you will eventually pay the same tax rate on these events. So to give you an example, let's say you're paying around 12% 13% of California taxes. You have a ton of money in the stock market and you have a bunch of money in your retirement accounts and you're getting ready to retire or maybe move. If you move to Texas, maybe you wait until you solidify that move and get the Texas residency for the full year before liquidating or selling some of your stocks or doing a Roth conversion, because now we're going to avoid that painful California tax simply by timing the events where we can move it into being taxed in a state with little, with less or no taxes. So here's a great timing opportunity that a lot of you guys especially. We see a lot of folks moving to Florida for retirement. We can time this now. Maybe move to Puerto Rico, which is even cooler for tax reasons. That's another conversation, but we can time this so we can create some opportunities here for you guys.
Speaker 1:So I want to sum this up for you. We have five ideas here that most of you are missing. One, the location of your LLC is not going to have any tax implications. Two, the losses from other states will likely not offset or help you very much for offsetting the income in the state that you live in. Three, you got to make sure that you acknowledge the different K-1s at the federal and state level to have a complete and accurate return and avoid the tax traps and the audits. And then four, be aware of the potential state tax credits that roll into your 1040 from your K-1s or taking advantage of the pass-through entity tax election with your S-corporation or partnerships. And then five, the timing can be a critical opportunity for you to time these transactions and shift the taxation of these events from a high tax state to a low or no tax state.
Speaker 1:If you find this helpful, you want to dive deeper into some of the many ideas that we have to help reduce your taxes. Go to prosperocpacom slash apply to see how we may be able to help you out. If you're a high income earner, you're probably thinking how we may be able to help you out. If you're a high income earner, you're probably thinking how do I get started with all these tax savings ideas and who do I talk to? What works for me? Well, there's so much information out there and that's why we boiled this down to the simplest concepts in our tax planning checklist Three simple steps. We have a free guide for you that's going to help you get a high level understanding of what you could possibly be doing to reduce your taxes, whether you're just starting out or you're a high income earner making seven figures in profits. Go to taxplanningchecklistcom or just click the link below. You'll get access to a free mini course with video guidance and other free resources to help you begin understanding what's possible for you in tax planning.