Tax & Assurance Guidance

5 Taxes You Need to Know About

Posted on June 17, 2022 by

Tarah Ablett

Tarah Ablett

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Tax TypesEveryone may think of something different when they hear the word ‘tax’. Understandably so, as there are many different tax types business owners need to be aware of. Not only is it important to know the different types of tax, but equally important is an understanding of what may cause an entity to be liable for a certain tax. Here is a recap of some common tax types. 

1. Income Tax 

Income tax refers to the tax imposed by the IRS (Internal Revenue Service) and/or state taxing agencies on – you guessed it – net income. The IRS does not impose income tax on flow through entities, rather the income is taxed at the owner level, but some states do impose income tax on flow through entity income.  

2. Pass-Through Entity Level Tax 

Many states have adopted a newer tax regime that imposes either a mandatory or elective pass-through entity-level (PTE) income tax on entities generating business in the state. Requirements and applications for each state vary wildly, but the purpose among all the states remains the same – to save owners federal tax dollars. The IRS approved PTE taxation in Notice 2020-75 which helps individuals avoid the $10,000 state and local tax (SALT) deduction limitation—or the SALT cap—put in place by the Tax Cuts and Jobs Act (TCJA) in 2017.   

3. Sales Tax 

Most taxpayers, not just business owners, are familiar with sales tax. Sales tax is assessed based on the gross sales of goods and, sometimes, services depending on the state. There are several available exemptions from paying sales tax such as resale or manufacturing exemptions to avoid duplicate sales tax on an item or service.  

4. Franchise Tax 

A franchise tax is typically considered a privilege whereby states impose a tax for the privilege of doing business in that state. The amount of franchise tax varies from state to state and will still be expected to be paid even if a business is also chartered in other states that do not require a franchise tax. This is not a tax on traditional franchises but is considered separate from federal and state income taxes. 

5. Net Worth Tax—aka The Wealth Tax 

Not to be confused with income tax, the net worth tax is determined by the total net market value of assets owned by a taxpayer which can include cash, bank deposits, shares, cars, property, pension plans, housing, and trusts. Typically, liabilities such as mortgages and other loans are deducted from the overall wealth total for tax considerations. 

Continue the Conversation 

Especially when it comes to multi-state taxation, it is important to understand what may cause nexus – or a state’s right to tax. Gone are the days of a physical presence requirement and numerous states have revamped their nexus standards to include an economic presence requirement. Contact us to learn more.  

Tarah Ablett

Manager

Tarah helps manufacturing and industrial automation clients leverage tax planning opportunities and navigate tax compliance issues.

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