Businesses operating in Nevada which exceed the $4 million revenue threshold are required to file the Commerce Tax return, a privilege tax similar to franchise tax.
Nevada is one of nine states in the United States that does not have state income tax. Instead, they rely on the revenue generated by companies operating in Nevada to provide necessary funding. For companies that exceed $4 million in a tax year, they will be required to submit the Commerce Tax Return and pay the required tax.
Nevada did not always tax their companies. In fact, the Commerce Tax is a fairly new tax, signed into law in 2015. It was modeled after the similar taxing methods in states with franchise tax.
The following questions are commonly asked questions regarding Nevada Commerce Tax and how it works.
What is a Company in Nevada?
Under Nevada’s state law and the Commerce Tax, any enterprise that engages financial transactions. So, if an individual had a regular nine-to-five job and decided for a little extra income they would rent out a spare bedroom in their house, the income generated from that would be seen as a business. Of course, a small example like that wouldn’t add up anywhere near the $4 million threshold.
Under the Commerce Tax, any business (corporation, limited liability company, etc.) that has a nexus to Nevada must pay their fair share of tax exceeding $4 million. By nexus, the company must somehow draw income from Nevada. For example, if an individual ran a completely online business and operated from their home in Nevada, that business would be subject to the Commerce Tax.
What are the Advantages and Disadvantages of Operating a Business in Nevada?
Nevada is known for many things – gambling, tourism, cattle ranching. It’s one of the ideal places to operate in hopes of striking gold. Opportunity is plentiful in Nevada. Here’s a few more advantages to opening a business in Nevada:
Advantage #1: No Income Tax
For businesses not flush in money, states with no income tax can sound like a dream. It cuts down on extra paperwork for bookkeepers and accountants, saving valuable payroll time. While income tax can seem like a small expense, it can skyrocket out of control. How? If a business owner is handling their own books and not versed in income tax regulations and wastes all their time communicating with the state, that’s less time to earn money for the company.
A little side note, any business owner considering opening a business and does not know tax law, it’s advisable to hire an accountant or bookkeeper well-versed in tax law and regulations. The best way to insure this – check their credentials (CPAs, Certified Bookkeepers, etc.).
Advantage #2: High-Threshold for Commerce Tax
Unlike states which require Franchise Tax (a privilege tax like the Commerce Tax), the threshold for paying taxes is $4 million revenue. It’s a reasonably high threshold for small business owners. Perhaps, not as high as casinos would like but for small business owners, it’s a dream.
Advantage #3: Limited Liability
It’s an oldy but a goody – the benefit of operating a business in a pro-business state. All properly structured companies – LLC (not sole proprietorship or general partnership), S-Corporation, and Corporation have the benefit of protecting shareholders/members from being held liable from company debts.
Advantage #4: Anonymity
Nevada has the soul of discretion. Need to protect the identity of shareholders/members? Done. Nevada is only one of four states in the United States to allow an option to keep the shareholders/members anonymous to the public which can be a huge relief. Privacy is king in the state with the corporations and LLCs.
However, businesses may be required to elect nominee board members who have fluid authority which can be removed at any time by the majority shareholders.
While Nevada has some exceptional advantages for operating business in their state, there’s some disadvantages as well.
Disadvantage #1: High Filing Fees to Open
Scared to open a business? Worried the fee will be too high? Nevada, unfortunately, has one of the highest filing fees in the United States. Their filing fees for a corporation are particularly high, compared to similar states. In the state of Nevada, the fee to file for a LLC is $425 and $725 for most corporations.
Disadvantage #2: Privacy is Limited
Remember the privacy advantage? There’s just one kink in an otherwise perfect chain for businesses – when an individual files for a company, they must like at least one member to start the company. Anyone with a grain of business knowledge could pay a nominal fee to get a hold of the filing papers.
Disadvantage #3: The Commerce Tax Can Be Killer
For those thinking of operating a business in Nevada, it’s crucial to stay on top of the revenue. Even if the revenue barely exceeds $4 million, there’s still an obligation to file. The Commerce Tax ranges from 0.051% for the mining industry all the way up to 0.331% for rail transportation. Interested in the entertainment industry?
Looking at a tax rate of 0.240%. May not seem like much but it adds up and can be a nasty surprise if the business didn’t plan ahead of time for it.
The Pros and Cons of Running a Business in a State with No Income Tax
The first advantage of running a business in Nevada is no income tax. At the same time, no income tax means several things for the state – less state government funding, higher property tax, and higher sales tax. But there are some pros to running a business in a state with no income tax.
1. One less tax for accountants to worry about.
2. Money becomes easier for business owners to save.
1. There’s less state money to help businesses out during difficult times.
2. Higher property tax. One of the most popular states without income tax, Texas, has one of the highest property taxes in the United States.
3. Higher sales tax. To make up from the lack of revenue from no income tax, the state charges a higher sales tax of 4.6%. The local government may charge an additional sales tax up to 3.55%. Most of the tax rates end up between 7.2% and 8.375%.
What are the Federal Taxes for Small Businesses in Nevada?
The federal income tax rate for small businesses stays the same regardless of state. Nevada does not have a state income tax so it does not modify the federal tax rate. The federal tax rate for small business owners depends on the structure of the company.
For people who run a sole proprietorship and single-member LLCs, the federal tax rate is 15.3% (for those who file their taxes on a Schedule C every year on their 1040). Please keep in mind – this is not the entire tax. The 15.3% is only for self-employment earnings. For most taxpayers filing under Schedule Cs, their total tax rate can be between 25.3% to up to almost 50%! This is why business advisors usually recommend structuring a company properly and filing the appropriate paperwork.
For those who run a small LLC with multiple members, the tax rate of 15.3% stands as the LLC is ran as a pass-through entity. Meaning the profit of the LLC is passed to the members, making them liable for the tax.
For those who create S-Corporations, the tax rate tends to be more generous. It’s often recommended to small business owners who cannot afford to eat the self-employment tax of 15.3%. S-Corporation is a pass-through entity, like the LLC, passing the profit to the shareholders who are then liable for the tax. The profit is taxed as ordinary income versus the self-employment. This means the tax rate could be as low as 10%, making it an ideal business structure for small business owners.
For those who prefer Corporations, the tax rate is currently a flat 21% (TCJA of 2017). However, this may change in the coming year. Keep an eye out for changes to the tax law.
Having said that, the benefit of paying the staggering tax rate of 21% is that the shareholders are not liable to pay that bill. The corporation is. There are a few exceptions to this rule, mostly having to do with fraud and ‘piercing the corporate veil.’
What are the Reporting and Filing Requirements in Nevada?
As discussed previously, Nevada requires the Commerce Tax to be filed every year if the company meets the threshold. Nevada also requires, like Texas, an annual information report – the officers, managers, physical/mailing addresses, etc. It’s a fairly simple process to update the information on the Nevada Secretary of State website.
The due date for the Commerce Tax is generally August 14 every year as long as it’s a weekday and not a holiday. As a general rule, the Secretary of State advises the return should be filed within 45 days after the end of the company’s fiscal year.
Again, the Commerce Tax return should only be filed if the company’s revenue exceeds $4 million in a fiscal year/tax year, depending on the company’s election. It should be noted Nevada measures their years from July 1 to June 30. Keep in mind this could affect the way the companies count their revenue for the year.
When the Commerce Tax return is filed, the tax is paid on the amounts exceeding $4 million. The $4 million is deducted from the total revenue. So, if a company makes $4.1 million in the entertainment industry, the tax owed would be $240.
Corporation A is the owner of a entertainment business. They file their Commerce Tax Return in 2021. They use the fiscal year of July 1 to June 30. They made $8.23 million. They have no eligible deductions or reductions. Using the tax rate of 0.240% and excluding $4 million, their tax liability would be $10,152.
Are there Quarterly Reporting Periods and What are their Due Dates?
It gets a little confusing with the Commerce Tax. After the first year in business, business owners may deduct up to 50% of their payments to the Commerce Tax through the Modified Business Tax (MBT), a payroll tax liability which is paid quarterly. The tax rate is also based on the industry the business is in.
The due dates are April 30, July 31, October 31, and January 31.
What are the Penalties and Interest on Late Taxes?
The way it works in Nevada the penalty and interest systems are quite reasonable and fair. The maximum penalty any business can receive for late filing is 10% of the tax due. The interest rate is 0.75% per month of the tax due. It starts the month after the original due date.
There is an exception to these penalty and interest rules. If a business owner believes they cannot reasonably file their return by the due date (let’s say their accountant is out of the country until September), they can file for a 30-Day Extension Form. During that extension, if they make good-faith payments to the Secretary of State, they avoid penalties and interest. If they don’t make payments, they’ll still be liable for all penalties and interest.
For those who may encounter this problem, a good rule of thumb is to make payments similar to the previous year. For example, if a company had to $3,000 the previous year, make the same payment the next year while waiting on the return to be filed. This keeps the business owner in compliance and the Secretary of State happy.
Corporation A, the same from the previous example, has received a letter from the Secretary of State. The state says they haven’t filed their Commerce Tax return. Corporation A quickly meets up with their accountant and files their Commerce Tax return. Unfortunately, it’s October 21. Now, Corporation A will be charged for three months of interest (0.75% per month) and 10% penalty for filing more than 31 days late.
So, assuming their liability is the same amount from the previous example ($10,152). The total amount after penalty and interest is $11,395.62. That’s $1,015.20 for penalties and $228.42 for interest. Even if the company doesn’t want to pay the penalties and interest, they will still be obligated to pay.
What is the Annual Minimum Tax Due Date?
The annual minimum tax due date is the same as the other due date for Commerce Tax – August 14 or within 45 days of the end of the fiscal year. If a business owner elects to pay up to 50% of their Commerce Tax with the MBT, they will still be required to pay the rest by August 14.