2025 State and City Tax Planning Updates
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- On January 22, 2025
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As we move further into 2025, businesses operating across various U.S. states must remain informed about significant changes in state and city tax laws. This guide provides a detailed overview of key tax updates that could impact your business operations this year. Staying updated on these changes will help ensure compliance with evolving requirements and enable you to refine your tax planning strategies effectively for 2025.
1. Ohio
Reduction in Commercial Activity Tax (CAT): Ohio’s 2024 budget introduces a phased reduction of the Commercial Activity Tax (CAT), a form of gross receipts tax (GRT). Starting in 2025, the tax rate will decrease from 0.26% to 0.22% on gross receipts over $1 million, with further reductions expected in subsequent years. Businesses should assess how these changes might impact their cash flow and future tax liabilities, particularly those with high gross receipts.
2. Texas
Franchise Tax Rate Reduction: Texas has approved a reduction in its Franchise Tax, which functions similarly to a GRT. Effective January 1, 2025, the rate for most businesses will decrease from 0.75% to 0.65% of taxable margin. Additionally, the exemption threshold for mandatory filing will increase to $1.5 million in annual revenue, potentially reducing compliance burdens for smaller businesses. This move aims to make Texas an attractive destination for new and expanding businesses.
3. Washington
B&O Tax Adjustments: Washington State’s Business and Occupation (B&O) tax, a type of GRT, will undergo rate adjustments in 2025. The general service rate will increase from 1.5% to 1.8%, while the rate for retailing activities will decrease from 0.471% to 0.450%. Companies in Washington should reassess their tax strategies to mitigate the impact of these rate changes, particularly those engaged in general service activities.
4. Oregon
Corporate Activity Tax (CAT) Adjustments: Oregon’s CAT will see an increase in the exemption threshold from $1 million to $1.2 million in gross receipts starting January 1, 2025. This change is intended to lessen the tax burden on smaller businesses, offering a more favorable environment for growth.
5. Delaware
Gross Receipts Tax Rate Increase: Delaware has enacted legislation to increase GRT rates by 0.1 percentage points across various categories, effective January 1, 2025. For example, the rate for retailers will rise from 0.754% to 0.854%. Companies operating in Delaware should prepare for these increases to avoid unexpected liabilities and adjust their pricing strategies accordingly.
6. New Mexico
Gross Receipts Tax Rate Reduction: Effective July 1, 2025, New Mexico will reduce its statewide GRT rate from 5.125% to 5.0%. This phased reduction is part of a broader initiative to stimulate business activity by lowering tax burdens on transactions, benefiting both businesses and consumers.
7. Hawaii
General Excise Tax (GET) Surcharge: Hawaii will implement a temporary surcharge of 0.5% added to the existing 4% GET rate, effective January 1, 2025. The funds generated from this surcharge will support statewide infrastructure projects. Businesses should prepare for increased costs in the short term and factor these changes into their pricing and budgeting.
State Corporate Income Tax Updates for C Corporations (Effective 2025)
1. Connecticut
- Digital Advertising Tax Proposal: Connecticut is exploring a corporate tax on digital advertising, potentially affecting C corporations. Implementation details are expected in 2025, pending legislative approval. Companies engaged in digital advertising should monitor developments closely to understand potential impacts.
- Temporary Surtax Expiration: The state’s temporary 10% surtax on corporate income for companies with income exceeding $100 million will expire at the end of 2024, lowering effective tax rates for large corporations in 2025. This expiration will provide some relief for large businesses operating in the state.
2. California
- Net Operating Loss (NOL) Deductions Reinstated: Suspended during COVID-19 to address budget constraints, NOL deductions for C corporations will be reinstated for the 2025 tax year. This change will allow businesses to carry forward losses to offset future taxable income.
- R&D Tax Credits Fully Restored: Limits on claiming R&D tax credits are lifted, enabling corporations to claim full credits starting in 2025. This restoration aims to incentivize innovation and support the state’s tech-driven economy.
3. New York
- Corporate Franchise Tax Rate Reduction: The temporary 7.25% corporate franchise tax rate for businesses with taxable incomes over $5 million is set to expire on December 31, 2024, reverting to 6.5% in 2025 unless extended by new legislation. Businesses should evaluate their tax liabilities and adjust their financial planning accordingly.
- Metropolitan Transportation Business Tax Surcharge Increase: The surcharge rate will increase to 30% for tax years beginning in 2025, impacting corporations in the NYC metro area. This increase is intended to fund improvements to the metropolitan transportation infrastructure.
4. New Jersey
- Reinstatement of Corporate Surtax: A 2.5% surtax on corporate income over $10 million, originally scheduled to sunset in 2023, was extended through 2025, maintaining the total effective tax rate at 11.5%. Large corporations should prepare for the continued high tax rate.
- GILTI Adjustments: Changes to the treatment of Global Intangible Low-Taxed Income (GILTI) will take effect, impacting multinationals operating in the state. Businesses should reassess their international tax strategies in light of these changes.
5. Massachusetts
- Single Sales Factor Apportionment: Starting in 2025, Massachusetts will adopt single sales factor apportionment, simplifying income sourcing for multistate corporations by basing tax liability solely on in-state sales. This change aims to reduce complexity for businesses operating in multiple states.
6. Florida
- Temporary Tax Rate Adjustment Ends: The corporate income tax rate will increase from 3.5% to 5.5% on January 1, 2025, as the temporary reduction expires. Businesses should plan for higher tax liabilities starting in the new year.
- Tax Credit for Small Businesses: New credits for small businesses with revenues under $5 million will be available, reducing liabilities and providing relief to smaller enterprises.
7. Georgia
- Flat Corporate Income Tax Rate: Effective January 1, 2025, Georgia will transition to a flat 5.49% corporate income tax rate, replacing its tiered structure. This change is designed to create a more predictable tax environment for businesses of all sizes.
8. Tennessee
- Corporate Income Tax Rate Reduction: Tennessee will lower its corporate income tax rate from 6.5% to 6.0%, effective January 1, 2025. This reduction will benefit all C corporations operating in the state, making Tennessee a more attractive location for business.
- Elimination of Throwback Rule: A reform removes the throwback rule, preventing double taxation on out-of-state sales. This change is expected to simplify tax compliance for businesses involved in interstate commerce.
9. Illinois
- Decoupling from Federal Bonus Depreciation: Illinois will no longer allow C corporations to claim 100% federal bonus depreciation on qualified property starting in 2025, which will impact taxable income calculations. Businesses should prepare for changes in how capital expenditures are treated.
- Research Incentive Extension: The state’s R&D tax credit program is extended through 2030, with increased caps starting in 2025, encouraging further investment in innovation.
10. Minnesota
- Combined Reporting for Foreign Entities: Minnesota will require mandatory combined reporting of foreign income, including GILTI, effective in the 2025 tax year. This change will impact multinational corporations by requiring them to include foreign income in their state tax base.
- Corporate Tax Rate Adjustment: The corporate tax rate will decrease from 9.8% to 9.5%, starting January 1, 2025, offering some relief to businesses operating in the state.
11. Michigan
- Corporate Income Tax Stability: No major changes have been announced for 2025. The flat 6% rate remains unchanged, providing stability for businesses operating in Michigan.
- Investment Incentives: Michigan has expanded tax credits for manufacturing investments, applicable in 2025, aiming to stimulate growth in the manufacturing sector.
12. Maryland
- Phase-In of Single Sales Factor Apportionment: Maryland will complete its transition to single sales factor apportionment for all C corporations by January 1, 2025. This change is expected to simplify tax compliance for multistate businesses.
- Digital Advertising Tax Expansion: The state is reviewing legal challenges and may broaden its digital ad tax to encompass more businesses in 2025. Companies involved in digital advertising should closely follow these developments.
13. Pennsylvania
- Corporate Net Income Tax Reduction: Pennsylvania’s phased reduction plan continues, lowering the Corporate Net Income Tax rate from 8.99% to 8.49% effective January 1, 2025. This reduction is part of the state’s broader strategy to make Pennsylvania more competitive for businesses.
- New Compliance Requirements: Stricter transfer pricing rules will apply to related-party transactions starting in 2025, necessitating careful review of intercompany agreements.
14. New York City
- Business Corporation Tax Rate Changes: Similar to the state-level tax rate, New York City’s 8.85% tax rate for large corporations is under review and may be adjusted for 2025. Businesses should stay informed about potential changes that could impact their tax planning.
- Apportionment Formula Update: NYC is considering aligning its apportionment method with the state’s single sales factor approach, which could simplify compliance for businesses operating in both jurisdictions.
Key Takeaways for 2025 Tax Planning
- Focus on Apportionment Changes: Several states, including Massachusetts and Maryland, are shifting to single sales factor apportionment to streamline tax calculations for multistate corporations. This shift simplifies how businesses calculate their in-state tax liabilities and may impact where they choose to expand operations.
- Reduced Rates in Competitive States: States like Tennessee and Texas are reducing corporate tax rates to attract business investment, signaling a trend towards more business-friendly environments.
- Special Surtaxes and Expirations: States like New Jersey and Florida are adjusting temporary tax rates, significantly impacting large corporations. Companies need to be aware of when these surtaxes expire or get extended to plan accordingly.
- Compliance Adjustments: New rules, especially around transfer pricing and digital advertising taxes, will require close attention in states like Maryland and Connecticut. Businesses should engage with tax professionals to ensure they remain compliant and take advantage of available incentives.
For additional guidance, consult state-specific tax bulletins or professional advisors to ensure compliance and optimize tax planning for 2025.
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