As a business owner, you know this simple truth: money makes the world go round. Or, at least, it keeps the lights on and your lease active for another year.
As a savvy business owner, you think ahead to situations that will cause you to lose money, like that annual deadline as inevitable as death. Tax Day.
Here’s the good news: you can’t avoid taxes, but you can lower your tax burden. If you run a business in Florida, you’re already one step ahead–it has one of the lowest tax burdens in the entire country.
Here’s everything you need to know to understand your Florida taxes and take charge of your money.
The Major Taxes in Florida
Florida has quite a lot of different taxes (including citrus taxes) but there are a few main categories of taxes you need to worry about in Florida:
- Corporate income tax
- Sales and use tax
- Property tax
Florida has additional taxes, some of which are so high that they can offset gains made in other tax areas. However, most businesses will have to deal with these three categories of taxes, which is why we’ll focus primarily on these.
How Florida Differs from the Other States
Florida’s tax burden is low compared to other states because there are several taxes that Florida simply does not collect.
For example, Florida is one of just seven states with no income tax (the others are Alaska, Nevada, South Dakota, Texas, Washington, and Wyoming). This is particularly attractive for those nearing retirement, as Florida also doesn’t apply income tax to Social Security benefits, IRA or 401(k) withdrawals, or pensions.
The benefits don’t end in old age, either. Florida doesn’t have estate or inheritance taxes, repealed as of 2005 and prohibited by the state constitution.
Keep in mind that federal taxes still apply, though there are plenty of ways for the richest 1% to sidestep taxes.
Understanding Tax Types
With that in mind, let’s take a look at the types of taxes Florida does collect.
Keep in mind that several of these taxes come with addendums and loopholes. For example, Florida doesn’t collect income tax, but it does collect corporate income tax (depending on your business type). Similarly, Florida collects property taxes, but there are several exemptions.
Great news for small business owners: Florida offers tons of advantages to you! Regulations are actually pretty minimal compared to other states and barriers to entry are few and far between.
Florida also demands less in taxes than most other states. In fact, they don’t charge income tax with a few exceptions. Fortunately for small business owners, these exceptions actually work out in your favor, since they’re targeted toward large, traditional corporations rather than small local businesses.
C vs S Corporations
Where Florida corporate income taxes are concerned, it’s vital to understand the difference between C corporations and S corporations.
A C corporation is a traditional corporation structure in which shareholders are taxed separately from the business entity. Taxes are paid on corporate earnings before distributing dividends to shareholders, at which point dividends are subject to personal income tax.
An S corporation instead elects to pass corporate income taxes, losses, deductions, and credits through to shareholders for tax purposes. This means that shareholders report income and losses on their personal tax returns, avoiding the double taxation seen in C corporations.
C corporations are the only ones subject to corporate income tax in Florida, though the rates are relatively low. S corporations are functionally shielded from corporate or personal income tax since business income and losses are only subject to personal income tax, which is not charged in Florida.
If you are subject to corporate income tax, get a tax planning attorney on retainer. It’s one of the best investments you can make for your bottom line.
LLCs, Partnerships, and Sole Proprietorships
A limited liability company, or LLC, is a type of business structure where the business owners are not personally liable for the business’s debts. It works as a combination of a corporation and a partnership.
Basically, it’s a pass-through entity designed to shield business owners from financial and legal risks. Most (but not all) LLCs in Florida do not pay state income tax because they are not corporations. If an LLC is incorporated, Florida taxes it.
A partnership is a relationship between two or more people to carry on a business. Like an LLC, it is generally regarded as a pass-through organization (i.e. profits and losses from the business are passed through to the partners). Florida does not demand income tax from partnerships.
Sole proprietorships are the big winners of the Florida tax game. A sole proprietorship is not a business entity, but rather a person who owns a business and is responsible for its debts. In the eyes of the IRS, the person and the business are interchangeable.
This means that personal taxes are applied to the business. For federal income tax purposes, you’re taxed at the normal personal tax rate. But since Florida does not collect personal income tax, you won’t have to pay any income tax for your business.
A sales tax is a tax placed on goods or services, paid directly to the state in which a business operates. This is calculated by applying a percentage to the taxable price of the sale.
It’s related to use tax, which is due on the use or consumption of taxable goods if sales tax was not collected at the time of purchase.
Florida takes a general state sales tax rate of 6%, though some items may have their own unique sales tax rates, such as:
- Amusement machine receipts (4%)
- Leases and licenses of commercial property (5.7%)
- Electricity (6.95%)
There are also discretionary sales surtax rates, which vary from county to county and cover most transactions subject to sales tax. Registered sales tax dealers (you) must collect the surtax from their customers and pay it to the Florida Department of Revenue.
If sales tax and surtax are applied to a transaction and the transaction falls between two whole dollar amounts, Florida uses a bracket system to calculate tax on amounts less than a dollar.
Do You Have a Tax Nexus?
Here’s the good news: you don’t have to worry about sales tax in Florida unless you have a sales tax nexus, which is a fancy way of saying a connection between the taxing jurisdiction and the entity being taxed.
Florida considers you to have a sales tax nexus if you have any of the following in the state:
- Ownership of property in the state
- Rentals, leases, or licenses to use real property
- Rental or lease of personal property
- Rental of short-term living accommodations
- An employee present in the state
- Sale of taxable items at retail
- Manufacturing or producing goods for sale at retail
- Importing goods from any state or foreign country for the purposes of sale or use in business or pleasure
- Providing a taxable service
Still confused? The Florida Department of Revenue has additional guidance on sales tax nexuses.
Is What You’re Selling Even Taxable?
If you do have a sales nexus in Florida, the next step is to determine whether what you’re selling is actually taxable (it might not be).
Services in Florida generally are not taxable, but if your service includes providing or repairing a product, you may run into sales tax on products. On that note, keep in mind that tangible products are almost always taxable in Florida, barring a few exceptions such as groceries and some medicines.
Finally, there’s Florida property tax, which, like much of the Florida tax code, is a bit of an odd beast.
According to Florida’s constitution, all revenue from property taxes is reserved for local governments. This means that the state itself doesn’t touch your property taxes.
In addition, property taxes are based on the “just value” (i.e. fair market value) of the property, based on the assessment of an appraiser on January 1 of each year. Your property taxes may rise each year, but thanks to the “Save Our Homes” cap, increases are limited to 3% of the previous year’s assessment.
However, Florida offers several property tax exemptions, including a homestead exemption, exemptions for seniors, four types of veterans exemptions, a $500 exemption for widows and widowers who have not remarried, and exemptions for disabled homeowners.
Let's Make Sense of Florida Taxes
Is your head spinning yet?
The Florida tax code is surprisingly forgiving, but as you can see, it’s also full of technicalities and addendums that make it difficult for the average person to understand, even if you’re a seasoned business owner.
That’s where we can help. We’ve been helping families and business owners just like you for over 30 years. If you need to speak with us about your tax planning options, click here to get in touch.