• Tariff-driven business model changes may affect P.L. 86-272 protections and trigger throwback exposure.

• Throwback and throw-out rules can tax income in original states when destination states don’t impose income tax.

• Reshoring strategies tied to tariffs should be reviewed through a tax lens to manage nexus and apportionment exposure.

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Tariff uncertainty continues to challenge manufacturers and distributors. In response, many businesses are making fast, sometimes reactive decisions: shifting fulfillment strategies, diversifying suppliers, and reworking customer contracts. While these steps are often necessary to protect margin, they can have unexpected ripple effects — particularly when it comes to state income tax exposure.

As operations evolve, companies may unknowingly trigger state-level tax rules — including throwback and throw-out provisions — that can increase tax burdens in their home states. These rules are rarely top of mind during operational planning, but, in today’s climate, they should be.

What You Think You Know: Public Law 86-272 Protections

Public Law 86-272 (P.L. 86-272) has long been a helpful shield. It protects companies from state income taxes when their only activity in each state is asking for orders for tangible personal property, and when orders are approved and fulfilled from outside that state.

But P.L. 86-272 isn’t a blanket exemption — and it doesn’t prevent other states from taxing that same income through alternative mechanisms. That’s where throwback and throw-out rules come in.

In response to evolving e-commerce practices and the Multistate Tax Commission (MTC’s) revised Statement of Information on P.L. 86-272, several states have taken steps to limit the scope of this federal protection:

• California: Issued Technical Advice Memorandum 2022-01, aligning closely with the MTC’s guidance. The memorandum specifies that certain internet-based activities, such as post-sale help via electronic chat or email, may exceed the protections of P.L. 86-272.

• New York: Released draft regulations incorporating the MTC’s examples, showing that interactive internet activities could lose P.L. 86-272 immunity. The regulations are currently in draft form and subject to change.

• New Jersey: Announced a policy change to evaluate P.L. 86-272 protection on an entity-by-entity basis within combined groups, potentially altering the tax obligations of group members.

• Minnesota: Circulated a draft revenue notice in April 2023 proposing adoption of the MTC’s revised guidance, signaling a move towards stricter interpretations.

Businesses using these states should closely examine their internet-based activities to assess potential tax implications under the updated interpretations of P.L. 86-272.

Throwback and Throw-Out Rules: Why They Matter

In states that enforce these rules, untaxed sales into other states can be “thrown back” to the state of origin. Here’s how:

• Throwback rules require that if you’re not taxed on a sale in the destination state (for example, due to P.L. 86-272), the income from that sale must be reported in the state where the goods were shipped from.

• Throw-out rules remove untaxed sales from the apportionment formula, which can artificially inflate your tax burden in the states where you do pay.

These rules can significantly shift your tax liability — especially if you’re shipping into multiple states where you have no nexus but generate substantial sales volume.

In a recent engagement for a new client, we found that the location of the client’s warehouse was the largest factor in planning when potential throwback was considered. If the client relocated operations from a throwback state to a non-throwback state, the impact on the sales factor in the apportionment formula was neutralized. Setting up operations in a state with throwback led to an inflated sales factor in the apportionment formula and an unexpected state tax liability.

Having conversations before transactions is extremely valuable as proper planning can lead to potential tax savings.

Why Tariff Responses Are Quietly Changing Your Tax Profile

Tariffs aren’t just a global trade issue, they’re reshaping day-to-day decisions inside U.S. companies. For many manufacturers and distributors, the last year has been a series of rapid adjustments: rethinking where goods come from, how they’re delivered, and how quickly orders get to customers.

You may have shifted fulfillment closer to major markets to cut lead times. Maybe you’ve swapped offshore suppliers to sidestep new tariffs. Some companies have moved toward direct-to-consumer models, while others have quietly changed how customer orders are approved or supported.

Individually, these decisions may feel operational. But taken together, they have a real impact on how income is sourced and taxed across states. They can shift your exposure under throwback or throw-out rules — especially if your sales are increasing in states where you don’t currently have income tax obligations.

In short, what begins as a supply chain fix can evolve into a state tax issue — often without anyone realizing it until filing time.

Reshoring and Tax Considerations Go Hand in Hand

For many companies, reshoring has become a practical response to ongoing tariff uncertainty. Bringing operations back to the U.S. can reduce exposure to trade risk and improve supply chain control — but it also reshapes how and where your business is taxed at the state level.

Operational changes like relocation or restructuring can result in:

• Nexus creation in new states

• A shift in which sales are protected by P.L. 86-272

• Adjustments to your apportionment formula

• New reporting obligations, credits, or incentive opportunities

While every business has unique goals, involving tax professionals early in reshoring or fulfillment planning can help find potential exposure or compliance gaps — without delaying execution.

For example, when companies shift operations to avoid tariffs by opening new distribution hubs or adjusting shipping routes, the tax impact extends beyond coordination. These changes may influence how income is apportioned and whether certain sales fall under throwback or throw-out rules.

Tax professionals can support this process by:

• Modeling apportionment changes: Projecting how operational shifts affect sales factor weighting

• Evaluating throwback exposure: Estimating tax impacts from untaxed destination-state sales

• Finding new nexus points: Highlighting where physical or economic presence may trigger new filings

These insights help companies anticipate tax consequences tied to operational agility (without crossing into trade policy or legal advice). It’s about making sure strategic decisions don’t lead to unintended risk at the state level.

What You Can Do

Protecting your company from unexpected throwback exposure doesn’t require slowing down — it just takes coordination. Here are three practical steps to take now:

1. Evaluate protected sales: Identify where you’re relying on P.L. 86-272 and whether the destination states impose income tax.

2. Map shipping and fulfillment models: Understand where goods originate and whether origin states apply throwback rules.

3. Review apportionment exposure: Determine how throw-out rules or untaxed sales may affect your overall income distribution.

Tax May Not Be the Driver — But It’s in the Passenger Seat

You’re adapting to economic pressure with speed and creativity. But every supply chain move or sourcing shift may have tax implications your business didn’t see coming.

P.L. 86-272 may protect your business in some states, but it doesn’t stop others from taxing that income using throwback or throw-out rules. And when tariff-driven decisions lead to reshoring, the tax impact becomes even more layered.

Understanding how these state rules apply can keep your strategy intact and your risk exposure in check.

Where Tax Strategy Meets Business Agility

MGO is a national tax, audit, and consulting firm serving growth-minded organizations across manufacturing, distribution, and consumer sectors. Our State and Local Tax (SALT) team works with companies navigating complex operational shifts, helping you align your tax strategy with business agility.

From throwback analysis to nexus reviews, we bring practical insight that supports fast-moving decisions and long-term resilience. Talk to us today about how to keep your operations moving — and your tax strategy aligned.

The post How Tariff Changes Could Affect Your State Tax Profile appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Beginning in 2025, domestic R&D expenses under Section 174 will once again be immediately deductible, offering potential cash flow benefits.

• Companies that previously amortized R&D costs may be able to file Form 3115 and adjust past filings to recapture deductions.

• With IRS scrutiny rising and state tax rules varying, proactive planning and clear documentation are critical to maximizing benefits and minimizing risk.

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The return of immediate research and development (R&D) expenses under Section 174 is one of the most consequential shifts in the 2025 tax landscape — yet many mid-market companies have not updated their plans to reflect the change. From documentation of risk to transition-year amendments, these are the most common questions we’re hearing from finance and tax leaders:

What exactly is changing with Section 174 in 2025?

Beginning in tax year 2025, domestic R&D expenditures will once again be immediately deductible in the year incurred. This change reverses the five-year amortization requirement introduced under the Tax Cuts and Jobs Act (TCJA). However, current IRS guidance shows that amortization will still apply to certain foreign R&D expenses unless more legislative or regulatory relief is provided. Businesses should evaluate both domestic and international R&D classifications in preparation for the shift.

Will this improve our 2025 cash flow position?

It may — provided the new expensing rules are properly integrated into your financial and tax forecasting. Immediate expensing of domestic R&D reduces taxable income in the same year the costs are incurred, lowering overall tax liability. Companies that have not yet adjusted their estimated tax payments or quarterly modeling may be overstating liabilities and missing near-term cash flow efficiencies.

Can we amend our 2022–2024 returns based on this update?

In some cases, yes. Companies that previously amortized Section 174 expenses may be eligible to file Form 3115 to change their accounting method and apply a Section 481(a) adjustment. This could allow for partial or full deduction of deferred R&D costs in 2025. However, the benefits and eligibility vary depending on your current method, the types of R&D involved (domestic versus foreign), and whether returns were previously extended, filed, or audited. A review of your filing history and applicable IRS guidance is necessary before proceeding.

Currently, there is uncertainty as to whether Form 3115 will be required to change the method from capitalization to expensing of these costs. The IRS needs to provide guidance in this area and whether or not small businesses that have average annual gross receipts of under $31 million that have not filed their 2024 tax return yet will need to capitalize their R&D costs on the 2024 tax return and then file an amended return to expense these costs.

Should we still separate costs that qualify for the R&D tax credit?

Yes — and this distinction is critical. While Section 174 requires capitalization (or expensing, beginning in 2025) of all R&D costs, the R&D tax credit under Section 41 applies to a narrower subset of those costs. Documentation should clearly delineate which expenditures qualify for credit versus which are deducted under Section 174. Maintaining separate records supports credit claims and mitigates examination risk.

Will this affect our state tax filings?

It may. Some states conform to federal Section 174 treatment automatically, while others decouple and apply their own rules. This can create differences in how R&D is deducted at the state level. For companies working in multiple states, it’s important to review each jurisdiction’s treatment of R&D expenses and track how decoupling may affect apportionment, deductions, and compliance requirements.

What are CFOs and tax leads overlooking most frequently?

In our recent tax reform webinar polling, we asked CFOs and tax leaders how Section 174 has impacted their company’s R&D and tax planning. Their responses:

• 17% said Section 174 changes had a significant impact

• 24% said they made some adjustments

• Over 50% indicated the impact was minimal or unclear

This suggests a gap between policy changes and planning execution. Many companies have not yet updated forecasts or examined whether transition-year filings could improve cash position. As a result, opportunities to unlock deductions or perfect quarterly payments may be unrealized.

What actions should we be taking now? 

Section 174 expensing should be addressed proactively during 2024 planning and Q3-Q4 reviews. Start by reviewing how R&D is treated in your current financial models and incorporate the updated expense rules into your 2025–2026 forecasts. If you amortized expenses in prior years, evaluate whether filing a method change (Form 3115) could allow you to recapture deductions, depending on what guidance is issued by the IRS from a procedural standpoint.

It’s also essential to keep clear and contemporaneous documentation — especially if you’re claiming R&D credit or have international R&D exposure. The IRS has increased scrutiny around improper claims and substantiation. Additionally, continue checking IRS guidance related to foreign R&D and coordinate any tax position changes with your broader strategy and compliance obligations.

Strategic Considerations

Section 174 expensing brings welcome relief for businesses investing in innovation, but it also introduces complexity — especially for companies with multi-year R&D planning or global footprints. By updating forecasts, assessing historical filings, and aligning documentation now, CFOs and tax leaders can better prepare for the 2025 transition and minimize risk. Early action supports stronger compliance, cash management, and credit positioning in an evolving regulatory environment.

How MGO Can Help

Our tax professionals have deep experience navigating the complexities of Section 174 and R&D credits. Whether you need help modeling the impact of immediate expensing, evaluating a method change, or separating costs for credit eligibility, we can guide you through every step. Contact us today to align your R&D strategy with the latest tax reforms and uncover potential savings.

The post Answers to Your FAQs About Section 174 R&D Expensing appeared first on MGO CPA | Tax, Audit, and Consulting Services.

Key Takeaways: 

• For decades, P.L. 86-272 protected activities like door-to-door sales and attending trade shows from taxation outside a company’s home state. 

• With more business conducted online, states want to expand the list of unprotected activities to include offering digital tools like chatbots and online portals. 

• Legal challenges are slowing down new regulations, but we expect enforcement efforts to continue to evolve. 

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Public Law 86-272 (P.L. 86-272) has played a defining role in shaping the boundaries of state income taxation since its passage in 1959. This federal statute prohibits U.S. states from imposing a net income tax on businesses with in-state activities limited strictly to the solicitation of orders for sales of tangible personal property, provided those orders are sent outside the state for approval and fulfillment. 

Historically, this law shielded out-of-state sellers with minimal physical presence in other states from income tax obligations. A classic example is a door-to-door salesperson who travels into a state to solicit orders but does not maintain an office, inventory, or engage in other business operations locally. 

Over time, the Multistate Tax Commission (MTC) published a widely-referenced list of protected activities — which included limited engagements such as attending trade shows for fewer than seven days or carrying product samples without taking orders on the spot. 

However, commerce has evolved since the 1950s. Business models today often blur the lines between physical presence and digital engagement. And in this increasingly digital marketplace, states are re-evaluating what it means to “solicit orders” and what activities should fall outside the protections of P.L. 86-272. 

Online Activities and Expanding Interpretations 

Modern business interactions rarely resemble the sales strategies in place when P.L. 86-272 was enacted. E-commerce sites allow for real-time order processing, customer service through chatbots, product recommendations powered by algorithms, and interactive tools that go far beyond simple solicitation. Recognizing these changes, tax authorities have begun to update their interpretations of unprotected activities to include many actions a company can perform digitally without a single employee stepping foot in the state. 

In 2021, the MTC approved revisions to P.L. 86-272 — including a new section on activities conducted via the internet. This section states:  

“As a general rule, when a business interacts with a customer via the business’s website or app, the business engages in a business activity within the customer’s state.” 

It also provided eight examples of internet-based activities that, if not de minimis, are unprotected. Some examples include using chatbots to provide post-sale assistance, placing “cookies” on customers’ computers, and allowing users to submit credit card applications or job applications through the website. 

A few states have indicated they will follow the 2021 statement but have not yet issued updated state regulations. Only a few states have issued formal guidance on unprotected internet activities. 

However, these interpretations are controversial. Taxpayers and business advocacy groups argue that states are stretching P.L. 86-272 beyond its original scope. States, on the other hand, maintain that the law must adapt to reflect a marketplace that no longer relies on door-to-door sales or mailed catalogs. 

A Patchwork of State Responses 

States are moving forward at different paces. Several efforts to formally incorporate expanded definitions of unprotected internet activities into regulation or statute have encountered legal and procedural obstacles. 

For example, New York finalized its regulations, which broadly interpreted unprotected digital activities in December 2023. These regulations were quickly challenged in court. Recently, a New York lower court upheld the validity of the regulations while limiting its enforcement to the period following their publication in December 2023. 

In California, enforcement of the Franchise Tax Board’s revised interpretation of PL 86-272 stalled following a lawsuit challenging the state’s guidance on procedural grounds. The state is expected to rework and reintroduce the effort in response. 

When New Jersey introduced proposed regulations incorporating parts of the MTC’s new guidelines on how PL 86-272 should apply to modern forms of business and customer interactions, opposition quickly followed. The same organization challenging California’s efforts issued a public statement objecting to New Jersey’s proposal and indicated litigation would follow if the rules were finalized. On June 16, 2025, New Jersey finalized its regulations despite the public comments in opposition. 

Clearly, there is tension between evolving interpretations and longstanding statutory protections. The outcome of these legal battles could shape state tax enforcement policies for years to come. 

How MGO Can Help 

For companies engaged in interstate sales and operating in the digital space, navigating the changing tax landscape can be challenging. Historically safe activities may now expose you to state income tax filing obligations if those activities fall outside the scope of PL 86-272 protections. In some cases, even simple customer interactions on a website could trigger nexus under newer interpretations. 

For that reason, it’s crucial to work closely with a state and local tax (SALT) advisor who closely monitors regulatory developments in all 50 states and regularly evaluates your business practices to assess exposure risks. 

Our dedicated SALT team can review how you interact with customers in each state, track where you offer digital tools like chatbots or application portals, and provide proactive guidance when expanding into new states or launching new platforms. 

Reach out to our team today to get clarity on the evolving boundaries of PL 86-272 and prepare for a more nuanced and potentially riskier state tax compliance landscape. 

The post The Future of Public Law 86-272 in the Digital Age appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• The new $40,000 state and local tax deduction is helpful but insufficient for those that own and operate pass-through entities. These taxpayers should look at pass-through entity tax (PTET) planning.

• PTET elections remain a key strategy for maximizing state tax deductions for federal tax purposes.

• Pass-through owners should have their tax advisors model multi-year tax exposure across state PTET rules.

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The 2025 tax reset isn’t just about federal rates — it’s reigniting state and local tax (SALT) strategy discussions for pass-through businesses and their high-earning owners.

With the SALT deduction cap rising from $10,000 to $40,000 and optional pass-through entity tax (PTET) regimes still in play across most states, CFOs and tax advisors need to re-examine how entity-level elections and personal income tax deductions on an owner’s 1040 Schedule A interact with one another. The decisions you make now could materially change both business and personal cash flow.

Key Takeaway #1: SALT Cap Now at $40,000 — But With a Catch

The increased cap allows for up to $40,000 of state and local tax deductions — a significant jump from the $10,000 limit placed on Schedule A deductions under the Tax Cuts and Jobs Act (TCJA) of 2017. But for most mid-market business owners and executives, it won’t make a huge dent without more planning.

Also keep in mind that with the SALT cap being raised to $40,000, this may make some or all of your state tax refund taxable on your federal return. This requires planning as well to determine the impact of the increased SALT cap. Additionally, there is a phase out of the $40,000 cap for taxpayers with modified adjusted gross income (MAGI) over $500,000. At $600,000 in MAGI, the SALT cap phases back down to $10,000. This phase out has been labeled the “SALT torpedo”.

Action tip:

• Confirm which state tax payments are eligible under the new definition (income, property, sales).

• Consider timing payments to maximize deduction value across years.

• Consider potential of federal taxability of any state tax refunds.

• Consider whether you may be subjected to the SALT cap phase out if your income is between $500,000–$600,000.

Key Takeaway #2: PTET Still Has Teeth — Especially in States Like California, New York, and Hawaii With the Highest State Tax Rates

Despite the higher SALT cap, the PTET remains a powerful tool — especially since entity-level taxes are generally not subject to the SALT cap at all.

In California, for example, the PTET election was extended through 2030, offering owners of S corps, LLCs, and partnerships a continuing opportunity to shift tax liability from personal to business returns.

Action tip:

• Take a hard look at PTET election scenarios for 2025–26 now with the new SALT structure in place retroactive to January 1, 2025.

• Consider combined strategies that include SALT cap maximization plus PTET layering.

• Model cash flow implications.

Key Takeaway #3: State-by-State PTET Strategy Still Matters

Not all state PTET programs are equal. Some states need annual elections, some require mid-year deposits, some are retroactive, and others carry risks of double taxation if owner-level credits aren’t managed properly.

Action tip:

• Review your state’s PTET mechanics and deadlines (especially if you operate a pass-through entity in multiple states).

• Coordinate with all of the business owners on credit carry forwards and reporting obligations. Verify the tax credit needs at the individual levels each year before making an election.

Case Study: How a California S Corp Owner Could Save up to $44,000

A California-based S corporation owner with $1.2 million in annual passthrough income faced a common dilemma: How to navigate state tax liabilities under the newly expanded SALT deduction while maximizing federal deductibility.

Before PTET:
The owner pays ~$130,000 in California income tax. Under the SALT cap — even raised to $40,000 — this would be phased back down to just $10,000 due to MAGI being over $600,000. The owner would technically lose out on a state tax deduction of $120,000+, increasing their federal tax burden by between $36,000-$44,000.

With PTET election:
The S corp elects to pay California’s pass-through entity tax. This shifts the majority of the state tax liability to the business level, allowing the owner to deduct $111,600 as a business expense and $10,000 on Schedule A, leaving only less than $10,000.

Net effect: Depending on the taxpayer’s bracket and other factors, this move could generate up to $44,000 in federal tax savings.

Take a Proactive Approach to Salt Cap and PTET Planning

The SALT cap increased itemized deduction is a welcome change — but it doesn’t cut the value of PTET planning. The most tax-efficient path in 2025 will likely involve stacking strategies: Using the $40,000 SALT deduction where applicable and electing the PTET to capture other deductions at the entity level. Each state’s rules vary, so a proactive approach is key.

How MGO Can Help

Want to assess whether PTET or SALT stacking makes sense for your entity structure? Contact our State and Local Tax team today to model your 2025 exposure and explore multi-state optimization.

The post How to Manage Deductions Under the New $40,000 SALT Cap and PTET Rules appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Expanding through contract manufacturing opens opportunities for your cannabis or hemp brand — but also brings complex financial and regulatory challenges.

• Stay ahead of tax risks by aligning your operations with both federal and state compliance rules.

• Strengthen your contracts and tracking systems to keep royalty payments accurate and transparent.

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Contract manufacturing arrangements can accelerate brand growth for cannabis and hemp companies, but they present complex tax, accounting, and compliance challenges. To protect financial integrity and valuation, companies must:

• Recognize and present revenue in a manner consistent with accounting standards and investor expectations. 

• Structure operations to preserve favorable tax status — especially for cannabis intellectual property (IP) entities avoiding Internal Revenue Code (IRC) §280E. 

• Monitor multi-jurisdictional tax nexus triggered by licensing activity. 

• Implement clear, enforceable, and regularly reconciled royalty calculation methods.

1. Revenue Recognition and Financial Presentation

Accounting Considerations

In contract manufacturing models, brand owners typically license IP to local manufacturers, who produce and distribute products under the brand name in exchange for royalty payments. Under U.S. generally accepted accounting principles (GAAP), this licensing arrangement should be accounted for as royalty income — distinct from product sales revenue recorded by manufacturers.

• Licensed operators: Recognize product sales with corresponding inventory and cost of goods sold (COGS).

• IP companies: Recognize only royalty income, without inventory or COGS.

For both cannabis and hemp operators, proper classification ensures financial statements reflect contractual entitlements — not hypothetical retail values — which can withstand both audit and investor due diligence.

Investor and Valuation Impact

Royalty-based models often report lower top-line revenue than direct sales, potentially influencing valuation multiples in capital raises. Your company can mitigate this perception by:

• Presenting retail market performance data as supplemental (non-GAAP) information.

• Demonstrating brand market share, pricing strength, and geographic expansion.

• Maintaining accounting integrity by ensuring GAAP statements reconcile with contractual royalty terms.

Sophisticated investors prioritize accuracy and contractual consistency over inflated revenue optics.

2. Tax Positioning and Regulatory Compliance

Cannabis: Preserving Non-280E Status

Cannabis IP holding companies that do not sell THC products directly and operate as an independent trade or business are generally not subject to IRC §280E and enjoy a significantly lower federal tax burden than state-licensed cannabis operators. However, maintaining this advantage depends on operational alignment between a company’s tax position and accounting presentation.

• Revenue must be recorded as royalty income, not product sales.

• General ledger (GL) accounts and financial statement categories must reflect licensing activity, not manufacturing operations.

Misalignment — such as recording product sales revenue while claiming 280E exemption — can trigger IRS scrutiny.

Hemp: Avoiding Misclassification

While hemp companies are generally outside §280E due to the 2018 Farm Bill, misclassification of revenue streams can still lead to incorrect tax filings, higher tax liabilities, or state compliance issues.

Proactive Compliance Measures

• Regular review of GL account descriptions and revenue categories.

• Documentation that ties reported revenue directly to licensing contracts.

• Periodic confirmation that financial presentation supports intended tax treatment.

For cannabis brands, this is critical to preserving 280E protection; for hemp, it safeguards proper business classification and tax outcomes.

3. State Tax Nexus and Multi-Jurisdictional Compliance

Income Tax Nexus

Licensing IP can create state income tax nexus without physical presence. States differ in sourcing rules — some focus on where products are consumed, others on where IP is exploited. Cannabis companies must navigate cannabis-specific rules layered over general sourcing provisions, while hemp companies contend with varied CBD/hemp regulations.

Sales Tax Considerations

Licensing arrangements may create sales tax obligations or require exemption certificate documentation. Hemp brands selling directly to consumers are typically subject to standard sales tax rules in each state.

Risk Mitigation

• Conduct nexus analysis regularly across all jurisdictions where products are sold.

• File returns in nexus states even if no tax is due.

• Document exemptions and monitor legislative changes.

Factor in marketing, contractor activity, and promotional events in nexus determinations.

4. Royalty Calculation and Documentation

Common Dispute Areas

Royalty disagreements often arise over:

• Gross versus net sales bases.

• Treatment of COGS, taxes, and regulatory fees.

• Allocation of shared costs (utilities, equipment, marketing).

• Returns, discounts, and promotional allowances.

Industry-Specific Nuances

• Cannabis: Must incorporate jurisdiction-specific excise taxes and licensing fees into formulas.

• Hemp: May face cost allocation issues related to compliance testing and certification.

Best Practices

• Include pro forma royalty calculations in contracts, tested with realistic production and pricing scenarios.

• Obtain written acknowledgment of the agreed methodology.

• Specify all potential chargebacks, shared costs, and allocation rules.

• Maintain separate royalty tracking systems.

• Perform periodic reconciliations between contractual formulas and actual payments to identify discrepancies early — an emerging industry best practice.

• Consider independent accounting reviews to validate partner-reported figures.

• If the manufacturer and the IP company are related parties, contracts should be reviewed in relation to tax transfer pricing rules that require arm’s length and market rate terms.

Position Your Brand for Contract Manufacturing Success

Contract manufacturing can offer compelling growth opportunities for your cannabis or hemp brand. The key to sustainable success lies in disciplined revenue presentation, strong tax positioning, proactive compliance, and robust royalty oversight.

By aligning accounting standards with tax objectives, maintaining transparent investor communications, and reconciling royalties regularly, your company can position itself to expand with confidence while minimizing regulatory and financial risk.

How MGO Can Help

We help cannabis companies across the U.S. to navigate complex accounting and tax challenges — including contract manufacturing arrangements. Whether you’re structuring royalty agreements, managing state tax compliance, or preparing for a potential audit, our dedicated Cannabis practice can help you grow smarter. Reach out to our team today to learn how we can support your goals.

The post 4 Critical Tax and Accounting Considerations for Cannabis and Hemp Contract Manufacturing Arrangements appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• 100% bonus depreciation is back, and real estate owners and developers should act quickly to maximize deductions based on timing and qualified property use.

• Permanent Section 199A and 163(j) changes offer increased planning certainty and expanded benefits for REITs and other real estate businesses.

• New rules for residential condo developers and REIT subsidiaries provide you with targeted relief and flexibility, but only for contracts and tax years moving forward.

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The reconciliation tax bill signed into law by President Trump on July 4 sets out sweeping tax changes, with many provisions of interest to the real estate industry. This Alert highlights the most important changes for the industry to focus on in tax planning.

With the legislation now final and generally in effect, taxpayers in the real estate industry should evaluate the implications of the new legislation for their business and work with tax advisors to assess the impact of the provisions, especially those noted below, and identify planning opportunities and challenges.

Bonus Depreciation

The legislation permanently restores 100% bonus depreciation for property acquired and placed in service after January 19, 2025, for which there was no written binding agreement in effect before January 20, 2025. It also creates a new elective 100% depreciation allowance under Section 168(n) for any portion of nonresidential real property that is considered “qualified production property” (the QPP election). The QPP election is available if construction on the property began after January 19, 2025, and before January 1, 2029, and the property is placed in service by the end of 2030.

A qualified production activity includes the manufacturing of tangible personal property, agricultural production, chemical production, or refining. Qualified production property does not include property located outside the U.S. or U.S. possessions or any portion of building property that is used for offices, administrative services, lodging, parking, sales activities, research activities, software engineering activities, or other functions unrelated to qualified production activities. Property with respect to which the taxpayer is a lessor is not considered to be used by the taxpayer as part of a qualified production activity even if the property is used by a lessee in a qualified production activity.

There is an exception from the original use requirement if acquired property was not used in a qualified production activity between January 1, 2021, and May 12, 2025. Special recapture rules apply if the property is disposed of within 10 years after it is placed in service.

Insights

The restoration of 100% bonus depreciation is a welcome provision of the new legislation.  Qualified improvement property will continue to qualify for bonus depreciation, as will land improvements and other MACRS recovery property with a recovery period of 20 years or less. The placed-in-service date will be important, as property placed in service in 2024 will qualify only for 60% bonus depreciation and property placed in service between January 1, 2025, and January 19, 2025, will qualify only for 40% bonus depreciation.

Additionally, allowing producers, refiners, and manufacturers to fully expense buildings rather than depreciate them over 39 or 15 years is a substantial benefit. The definition of “production” will be important, and generally requires “a substantial transformation of the property comprising the product.” Taxpayers with buildings that house both qualified production activities and other administrative, office, or research functions will also likely need to perform an analysis to allocate costs between functions.

Section 199A

The legislation makes permanent the 20% deduction for qualified business income under Section 199A and favorably adjusts the phaseout of the deduction for taxpayers who do not meet the wage expense and capital investment requirements or who participate in a “specified service trade or business.”

Insights

The permanency of this provision provides welcome certainty for real estate investment trusts (REITs) and other real estate businesses. The safe harbor for rental activity to qualify as a Section 199A trade or business under Rev. Proc. 2019-38 remains in effect.

Section 163(j) Interest Deduction Limit

The legislation permanently restores the exclusion of amortization, depreciation, and depletion deductions from the calculation of adjusted taxable income for purposes of Section 163(j), which generally limits interest deductions to 30% of adjusted taxable income. The change is effective for tax years beginning after 2024.

Insights

This provision should allow many taxpayers in the real estate industry to reduce or eliminate their Section 163(j) interest expense limitation without making a real property trade or business election, which will preserve their ability to take bonus depreciation on qualified leasehold improvement property.

Taxable REIT Subsidiary Asset Test

The legislation raises from 20% to 25% the portion of the gross asset value of a REIT that may be attributable to equity and debt securities of taxable REIT subsidiaries, effective for tax years beginning after 2025.

High-Rise Residential Condominium Development, Construction and Sale

The legislation allows the completed contract method of accounting for many residential condominium, construction, and sale projects, effective for contracts entered into after July 4, 2025. For residential developers meeting the average annual gross receipts test under Section 448 ($31 million in 2025), the maximum estimated contract length is increased from two years to three years to qualify for the exception from the UNICAP rules under Section 263A.

Insights

This provision provides much needed tax relief to condo developers who often had to report income under the percentage of completion method, which often required the reporting of income before receiving payment. Allowing the use of the completed contract method of accounting allows better matching of reporting taxable income with the receipt of cash by the developer.

Unfortunately, the relief is provided prospectively, only for contracts entered into after the July 4, 2025, enactment date.  Therefore, taxpayers with contracts entered into prior to the enactment date will continue to be subject to the old rules. Moreover, reporting income for projects begun in prior years may be bound to the prior method of accounting.

SALT Cap

The legislation makes the state and local tax (SALT) cap permanent while raising the threshold for 2025-2029 before reverting to $10,000 in 2030. The cap is increased to $40,000 for 2025 but phases down to $10,000 once income exceeds $500,000. Both thresholds will increase by 1% for each year through 2029. The final version of the legislation does not include the provision in the earlier House bill that would have shut down taxpayers’ ability to use pass-through entity tax regimes to circumvent the SALT cap.

Other Important Provisions and Notable Omissions

There are many other significant changes in the legislation. Of particular interest to the real estate industry, the legislation:

• Makes permanent the qualified opportunity zone program, including the deferral of capital gains through investments in a qualified opportunity fund, and updates the rules for investments made after 2026; current QOZ designations will expire early at the end of 2026.
• Phases out many Inflation Reduction Act energy credits early and imposes new sourcing restrictions.
• Repeals the deduction for energy efficient improvements to commercial buildings under Section 179D for property beginning construction after June 30, 2026.
• Makes permanent the increases to the low-income housing tax credit.
• Makes permanent the new markets tax credit.

In addition, there were several provisions under discussion that would have affected the real estate industry but that were not ultimately included in the final legislation. The final legislation:

• Does not include the “revenge tax” or “retaliatory tax” under proposed new Section 899, which had been included in the initial House-passed version of the bill and would have increased tax and withholding rates on taxpayers resident in countries imposing “unfair foreign taxes.”
• Does not include a provision included in the earlier House bill that would have required disallowed losses to remain subject to the Section 461(l) active loss limitation in future carryover years.
• Does not eliminate the carried interest “loophole,” despite President Trump having expressed support for such a provision.
• Does not include a limit on state and local tax deductions for businesses.

For a broad discussion of the provisions in the legislation, see BDO’s Tax Alert, “Republicans Complete Sweeping Reconciliation Bill,” and Comparison Chart of Key Provisions in the 2025 Tax Legislation.

How MGO Can Help

Navigating the sweeping tax changes in this new legislation requires more than a surface-level understanding. It calls for strategic foresight, detailed analysis, and expert guidance. At MGO, our real estate tax professionals are here to help you assess the impact of these new rules, strengthen your tax positions, and uncover planning opportunities tailored to your portfolio or operations. Whether you’re a REIT, developer, investor, or owner-operator, we’re ready to provide clarity, confidence, and customized strategies to help you thrive under the new tax landscape. Contact us to learn more.

Written by Julie Robins and Robert Schachat. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com

The post New Tax Law Includes Numerous Provisions Affecting Real Estate Industry appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• The party responsible for paying the tariff determines if the charge is included in the taxable sales price under state sales and use tax rules. 

• Sales tax treatment of tariffs varies by state, making it essential for businesses to stay updated on local laws to remain compliant and avoid penalties. 

• Businesses can reduce sales tax exposure by strategically structuring transactions to exclude tariff costs when legally allowed by state tax guidance. 

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Tariffs are not new, but dramatic increases in their rates have drawn attention to them.  

To mitigate the effects of those levies, some businesses have chosen to separately state tariff-related surcharges on their invoices, raising questions about whether such separately stated charges are subject to sales tax. 

While the inclusion of tariffs in the sales tax base varies across states, a common consideration is which party bears responsibility for the tariff. If the seller is the importer and passes the tariff cost to the consumer, that cost generally is included in the taxable sales price; however, if the purchaser is responsible, the tariff often is not included. Although many states have yet to provide specific guidance on this topic, some have addressed it.  

Consider some illustrative guidance from South Carolina and New Jersey. 

In 2020, South Carolina specified in Rev. Rul. 20-4 that for sales and use tax purposes, when the purchaser is the importer and therefore personally liable for the tariff, the cost of the tariff is not included in the gross proceeds of sales or the sales price. That is because the purchase of the item and the purchaser’s payment of the tariff are two separate transactions.¹ The purchaser’s sales and use tax is based only on the gross proceeds of sales or the sales price of the transaction with the seller. It does not include the cost of the tariff the purchaser pays to the federal government. 

If someone other than the purchaser is responsible for the tariff (such as when the seller is the importer and any or all of the cost of the tariff is recovered from the purchaser), the charge is includable in the gross proceeds of sales or the sales price. It also is subject to sales and use tax unless the retail sale of the tangible personal property is otherwise exempt. 

In May, New Jersey published guidance on the sales tax treatment of tariff markups. The guidance states that if a seller passes tariff costs to the consumer, the charges are subject to sales tax as part of the taxable sales price, even if the purchase invoice separately states the tariff. To illustrate that concept, the guidance offers the following example: 

If the U.S. government imposes a tariff on furniture imported from another country, that tariff is passed along to the furniture seller. A seller may increase the sales price of the furniture sold to customers to maintain its profit margins. If the seller marks up the price of the furniture, even if it is billed as a separately stated fee, the increased cost and/or fee is subject to Sales Tax since it is part of the taxable sales price. 

Understanding the impact of sales tax and tariffs across states requires careful consideration of which party bears the responsibility for the tariff and how that is reflected in the taxable sales price. The variability in state regulations means businesses must stay informed about local tax laws to help ensure compliance and refine their financial strategies. As demonstrated by the examples from South Carolina and New Jersey, whether the seller or purchaser is responsible for the tariff can significantly affect the tax implications.  

Insight 

For companies and consumers alike, evaluating the benefits of being the importer of record for large purchases could offer tax advantages by excluding tariff costs from the taxable base. Ultimately, navigating the complexities of sales tax and tariffs demands a proactive approach to understanding state-specific guidelines and leveraging them to mitigate financial effects.  

Written by Steven C. Thompson and Gregory Devlin. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com 

Navigating Sales Tax and Multistate Challenges with Confidence 

At MGO, we help businesses manage the complexities of sales tax, tariffs, and multistate compliance through tailored guidance and strategic planning. Our State and Local Tax (SALT) professionals work across industries like manufacturing, retail, and technology to address shifting regulations, reduce risk, and improve tax efficiency. Backed by deep technical experience and real-world insight, we support organizations in making informed decisions that align with their growth and compliance goals. Contact us to learn more.  

The post Sales Tax and Tariffs: Understanding the Impact Across States  appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• State tax restructuring helps reduce income and franchise tax liabilities through legal, operational, and financial structure adjustments. 

• Businesses with separate filing states, foreign ops, or upcoming transactions can benefit from tailored state tax restructuring strategies. 

• Intercompany transactions and transfer pricing studies are essential tools for compliant, audit-ready state tax restructuring plans. 

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As organizations expand organically or conduct strategic transactions or acquisitions, their state tax liabilities are likely to increase. State tax restructuring can be key to reducing state tax liabilities. Many companies are unaware of the restructuring options available and the opportunities they offer. State income tax restructuring can help organizations improve state tax efficiency and reach business objectives. By understanding the types of restructuring opportunities available, tax leaders can help their organizations become more state tax efficient.  

When Should a Company Consider State Tax Restructuring? 

State tax restructuring involves evaluating an organization’s state tax profile and identifying ways to change its operational, financial, or legal entity structure to help improve tax efficiency.   

While every organization’s situation is unique, the most common business profiles considered for restructuring include: 

• Organizations paying significant taxes in separate filing states;  

• Organizations that pay large amounts of state income taxes and have considerable foreign operations; 

• Organizations planning strategic transactions; and  

• Organizations with substantial franchise tax liabilities. 

Organizations Paying Significant Taxes in Separate Filing States 

There are opportunities to restructure to help reduce state tax liabilities — particularly for organizations that have significant state tax liabilities in separate filing states. Separate filing states impose tax on each corporation with nexus in the state, while mandatory combined filing states assess tax on the combined income of affiliates operating as a unitary business group. The orange states in the map below are separate filing states.  

Separate Filing States 

Map indicates U.S. separate filing states based on information available as of May 27, 2025: Alabama, Arkansas, Delaware, Florida, Georgia, Iowa, Indiana, Louisiana, Maryland, Mississippi, Missouri, North Carolina, Oklahoma, Pennsylvania, South Carolina, Tennessee, and Virginia. 

Organizations can leverage different filing methodologies across states and set up legal structures for tax planning purposes. For example, affiliated groups that have entities filing in separate and combined filing states can restructure their operations to report more income in combined filing states and less income in separate filing states, provided the restructuring is properly implemented and any intercompany dealings are well documented, at arm’s length, and consistent with applicable state tax laws. Reporting more income in combined filing states may reduce state tax liabilities in separate filing states while having minimal to no impact in combined filing states. 

Organizations That Pay a Significant Amount in State Income Taxes and Have Significant Foreign Operations 

Organizations that have foreign operations or plan to expand internationally can sometimes leverage their international presence to save state taxes. For instance, numerous unitary combined states exclude foreign corporate affiliates or “80/20 corporations” (that is, a corporation with more than 80% of its payroll, property, and/or sales outside the U.S.) from the combined group. Companies with foreign operations may be able to restructure their operations to minimize their state income tax liabilities but with minimal to no impact to their foreign tax liabilities. As with any planning, the restructuring must be properly implemented and documented to achieve state tax savings.     

Organizations Planning a Strategic Transaction 

Corporate and pass-through entities might also consider restructuring their businesses to help prepare for a major transaction or liquidity event. For instance, pass-through entities such as partnerships or S corporations can properly plan and restructure in anticipation of major transactions to help minimize the transactions’ state tax burdens on their owners. 

Organizations Paying Significant Franchise Taxes 

There are planning and restructuring opportunities for companies that pay substantial state franchise taxes based on their assets or net worth. Companies might also be able to use planning strategies to reduce their franchise tax bases or conduct business in alternative structures that can reduce their franchise tax liabilities. At times, the restructuring strategies that help minimize state franchise taxes may also serve to minimize state income taxes.    

Using Intercompany Transactions for State Tax Efficiency 

Intercompany transactions can help organizations reduce their state tax liabilities. However, to withstand audit scrutiny, transfer pricing studies must be performed to ensure intercompany transactions are conducted at arm’s length and consistently with applicable federal and state tax laws. Companies should consider restructuring strategies that incorporate intercompany transactions to mitigate state tax costs. However, it is critical that all intercompany transactions comply with federal and state transfer pricing rules, have legitimate business purposes, and are properly documented. 

What Is the Process for State Tax Restructuring? 

Restructuring an organization for tax efficiency purposes can be time and resource intensive, involving numerous internal and external advisors, including financial, legal, and tax professionals. Restructurings typically are executed in four phases: strategic assessment, design, implementation, and maintenance.  

Phase 1: Strategic Assessment 

Review the organization’s business data and information, including operations, financial data, income projections, and tax position. 

Develop various structural options, outlining associated business implications and the potential state tax impact and savings of each structure.  

Present a summary of findings to management and key stakeholders to evaluate the various restructuring options. 

Phase 2: Design 

• Conduct a comprehensive evaluation of the restructuring options to determine the most efficient structure. 

• Assess the business and tax considerations of the various structures.  

• Determine the restructuring option that will be pursued and develop an implementation workplan and execution timeline. 

Phase 3: Implementation 

• Manage and facilitate execution of the workplan, including legal, accounting, operations, human resources, payroll, tax, and other affected areas. 

• Conduct weekly meetings to assess progress, identify issues, and determine resolutions. 

• Work with accounting teams on system modifications to establish separate books and records for the new entities. 

• Perform transfer pricing studies and comparables research to identify arm’s-length price and prepare the transfer pricing report. 

• Prepare all business and tax registrations for the new entities. 

Phase 4: Maintenance 

• Perform a review to determine if procedures, policies, accounting, and other affected areas are operating as intended. 

As state tax authorities increase their scrutiny of complex tax structures, it’s critical for entities to maintain strong supporting documentation that defends any new structure’s business purpose. Organizations should maintain documentation that demonstrates transactions were conducted according to federal and state transfer pricing rules and at arm’s length. Separate balance sheets, income statements, board meeting minutes, and proper accounting of intercompany transactions are necessary for compliance.  

Pursuing a Restructuring Strategy 

While restructuring may seem daunting, it can significantly help strengthen your state tax posture and enhance state tax efficiency. 

For organizations considering restructuring to mitigate state income tax liabilities, adhering to compliance and legal standards is critical. Working with experienced advisors who have knowledge of state income tax, sales and use tax, transfer pricing, federal tax, and employment tax, can help companies navigate the complexities of state tax restructuring and develop strategies that align with their long-term objectives.  

Written by Mariano Sori-Marin and Shirley Wei. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com 

How MGO Can Help Optimize Your State Tax Structure 

MGO’s state and local tax professionals work with organizations to identify and implement restructuring strategies that reduce state tax burdens and support long-term growth. We provide end-to-end support — from strategic assessment through implementation and documentation — tailored to your unique operational footprint. Whether you’re preparing for a major transaction, navigating multistate complexities, or seeking tax efficiencies, our team delivers practical solutions grounded in compliance and informed by decades of experience. Contact us to learn more.  

The post How Restructuring Can Help Support State Tax Efficiency  appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• The new tax law permanently restores 100% bonus depreciation for qualified property placed in service after January 19, 2025.

• This change allows you to fully deduct eligible improvement costs upfront — improving cash flow and long-term planning.

• Real estate investors should watch for state-level differences and consider cost segregation studies to maximize the benefit.

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On July 4, President Donald Trump signed the One Big Beautiful Bill Act into law. Among the sweeping tax and spending provisions, one key change stands out for real estate investors: the return of 100% bonus depreciation.

Bonus depreciation is a powerful way to front-load deductions on qualifying property. Although it was first introduced in 2002 following the events of Sept. 11, the percentage deduction has varied over the years. Most recently, the 2017 Tax Cuts and Jobs Act (TCJA) increased bonus depreciation to a full 100% deduction. However, the TCJA also included a phasedown schedule — dropping the deduction to 40% in 2025 and eliminating it entirely by 2027.

Now, that phasedown has been reversed. The new law permanently restores 100% bonus depreciation for qualified property placed in service on or after January 20, 2025.

5 Ways the Return of 100% Bonus Depreciation Could Impact Your Strategy

If you’re investing in real estate, the return of 100% bonus depreciation creates new opportunities. Here are five ways it could affect your planning and cash flow moving forward:

1. You Can Plan Ahead With Certainty

For years, bonus depreciation rates have been a moving target. With this new law, you get consistency. Knowing that 100% bonus depreciation is now permanent gives you the ability to map out property improvements or acquisitions with a clear understanding of the tax impact. No more rushing projects to get ahead of a phase-down deadline. This is especially useful if you’re managing multiple properties or planning major capital expenditures.

2. Bigger Deductions Mean Better Cash Flow

Land improvements and qualified improvement property (QIP) — such as parking lots, landscaping, and interior upgrades to commercial buildings — are major expenses for real estate investors. With 100% bonus depreciation, you can deduct these costs in full the year they’re placed in service. That’s a non-cash expense generating real tax savings, freeing up cash you can reinvest into more properties, upgrades, or operations.

3. Bonus Depreciation Is Automatic — But You Still Have Options

The new law keeps the same framework: bonus depreciation is automatic unless you elect out. This means you don’t have to remember to file any special paperwork to claim the deduction. But if you’re planning to sell a property soon and want to avoid a large depreciation recapture, you still have the option to elect out of bonus depreciation for specific asset classes. That flexibility gives you more control over your long-term tax strategy.

4. Don’t Forget About State Taxes

While federal bonus depreciation is back at 100%, state treatment varies widely. Some states conform fully, others partially, and some not at all. Several states have flip-flopped in past years, some years complying with federal bonus depreciation rules and other years decoupling from the federal deduction, so it’s important to monitor changes over time. Failing to account for federal-to-state differences in depreciation can lead to surprises when filing your state returns. Work with a professional to stay ahead of shifting state policies.

5. Cost Segregation Studies Just Got More Valuable

With 100% bonus depreciation locked in, cost segregation studies are more useful than ever. These studies help you identify components of your property — like lighting, flooring, plumbing, land improvements and specialty electrical systems — that can be depreciated over five, seven, or 15 years instead of the standard 39 years or 27.5 years for residential real estate. That makes more of your investment eligible for immediate expensing. If you’re buying, renovating, or developing commercial or residential property, a cost segregation study could lead to substantial tax savings (use our cost segregation assessment tool to see if you could benefit).

Increased Opportunity and Complexity for Real Estate Investors

The return of 100% bonus depreciation is big news for real estate investors. It gives you stronger cash flow, more predictable planning, and powerful incentives to invest in and improve your properties. But it also adds complexity — from deciding when to elect out to understanding how state rules diverge from federal law.

How MGO Can Help

Our Real Estate team is ready to help you take full advantage of the new bonus depreciation rules. Whether you’re planning improvements, exploring a cost segregation study, or preparing for a property sale, we’ll work with you to uncover tax-saving opportunities and support your long-term investment strategy.

Reach out today to start planning your next move.

The post What New Bonus Depreciation Rules Mean for Real Estate Investors appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• High-tax states may challenge changes in residency — scrutinizing the number of days spent in the state, domicile intent, and income allocations.

• Income sourcing rules vary by state, increasing complexity for remote workers and business owners with sales, property, employees, or operations in multiple states.

• Strategic charitable giving can provide additional benefits at the state level.

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State and local tax (SALT) planning has become increasingly important for high-net-worth individuals as state and local governments revise their tax regulations in response to revenue needs and economic shifts. The patchwork of rules across jurisdictions brings both risks and opportunities.

High-tax states like California, Connecticut, Hawaii, Illinois, Minnesota, New York, New Jersey, and Vermont frequently introduce new regulations targeting affluent residents and non-residents who spend significant time in the state.

This article explores three critical SALT strategies: residency planning, income sourcing, and charitable giving.

Why State and Local Tax Planning Matters

Unlike the federal tax system, which applies uniformly to all U.S. residents, SALT rules vary widely from state to state and even city to city and can change rapidly.

Some states, like New York, impose high top marginal income tax rates and aggressively audit high earners who claim residency elsewhere. Others, like Florida or Texas, levy no personal income tax but may increase scrutiny around proving residency for new arrivals.

In 2023 and 2024 alone, several states enacted new tax surcharges, adjusted apportionment rules, or announced stepped-up enforcement for residency audits. As mobility increases and remote work becomes the norm, tax authorities are tightening their focus on where taxpayers earn income and where they’re truly domiciled.

Explore These 3 Key SALT Strategies

Each of the following planning areas offers a valuable opportunity to reduce state and local tax exposure:

1. Residency Planning: More Than Just a Mailing Address

Relocating from one state to another can be costly if you don’t plan for tax implications like income taxes and estate taxes — especially if you move from a high-tax state to one with little to no income tax (i.e. California to Florida). Making your move stick in the face of a state residency audit requires more than buying a home and changing your driver’s license.

“Domicile” is an important term in the tax world. It refers to your primary, permanent home. Statutory residency can apply even if your domicile is elsewhere — as long as you maintain a residence in the state and spend a threshold number of days there. For example, New York considers you to be a resident if you spend 184 days or more in the state during the taxable year. Hawaii considers you to be a resident if you spend more than 200 days of the year in the state — and those days don’t have to be consecutive.

Many states use time-based tests to determine tax residency, so maintaining a detailed log of your location or recreating the log using cell phone data or travel records can be a crucial audit defense.

Other factors tax authorities consider include where you vote, receive mail, go to the doctor, register your vehicles, and more. Residency audits can look back several years, so it’s crucial to maintain a consistent paper trail that aligns with your stated residency.

2. Income Sourcing: Where Is Your Income Taxable?

It’s also crucial to understand how income is sourced across states — particularly for taxpayers with multistate businesses, investment properties, or remote work arrangements.

States apply different rules to allocate income. Some use market-based sourcing, which sources receipts based on the location of customers (which can be determined in various ways). Other states use cost-of-performance sourcing, which sources receipts based on the location where the services are performed.

In addition to sourcing rules, states use different apportionment rules to allocate an organization’s income across states. Apportionment formulas may consider three factors (sales, property, and wages), a single sales factor, or industry-specific apportionment for certain business models or operating structures.

However, owners of businesses with revenue streams derived from multi-state customers should consider a sales sourcing assessment. A review of sales sourcing can potentially result in a decrease in the apportionment factor (leading to decreased tax liabilities) and minimize audit risks, interest, and penalties down the road.

Even working in another state for a day can lead to nonresident tax filing requirements. According to the Tax Foundation, 23 states have no meaningful nonresident individual income tax filing threshold — meaning nonresidents may need to file an income tax return if they spend a single day working in the state.

Other states have established minimum thresholds for nonresident filing requirements. For example, if you work more than 15 days and earn more than $6,000 in Connecticut, you’re required to file a nonresident return there. Meanwhile, Vermont requires nonresidents to file a tax return if they earn at least $100 in the state.

In many cases, you can claim a credit on your home state’s taxes for income taxes paid to another state. But even if filing in multiple states doesn’t increase your total tax liability, it increases the complexity of your filings.

3. Charitable Giving: Balancing Your Gifts with SALT Benefits

Taxpayers often think of charitable giving in the context of federal tax deductions, but some states offer tax benefits or credits that can increase the impact of your gifts.

Examples of SALT-friendly charitable giving include:

• State tax credit programs: Some states offer tax credits for contributions to certain types of organizations, such as school tuition programs or community foundations. Tax credits reduce your tax liability dollar-for-dollar, making them more valuable than tax deductions (which only reduce your taxable income).

• Donor-advised funds (DAFs): Contributions to DAFs allow you to bunch deductions in a year when income is unusually high due to the sale of an asset or a bonus payout. This strategy potentially optimizes both federal and state tax outcomes.

• Timing and entity selection: Consider whether to give personally or through a business in states with entity-level taxes.

Work with a tax advisor to identify state-level credits or programs that align with your philanthropic goals. Keep in mind that non-cash contributions may require a qualified appraisal and additional documentation.

How MGO Can Help

State and local tax planning and compliance are complex for taxpayers with significant income or assets across multiple states. At MGO, we work with high-net-worth individuals to help clarify your residency status, evaluate income sourcing risks, and design charitable giving strategies that align with both your personal goals and evolving state tax laws.

Our team stays current on legislative changes and audit trends across jurisdictions, helping you proactively adapt your planning. Whether you’re considering a change in residence, managing business income across multiple states, or looking to increase the impact of your charitable giving, we can provide the insight and support you need to make informed, strategic decisions. Reach out to explore how thoughtful SALT planning can support your broader financial goals.

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