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Incorporating in Nevada
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All US corporations are subject to federal income tax liability. Although there are many strategies involving the corporation that may reduce the federal tax liability, the state of incorporation is not a direct factor in reducing federal taxes. However, some strategies that will reduce fed3eral income taxes for corporation may require the use of a corporation from a specific jurisdiction, such as Nevada, due to several factors that are inherent in Nevada corporations.
The difference in tax liability becomes immediately apparent when looking at state corporate tax rates. The rate of tax among the states that have state corporate income tax ranges from 1 percent (Arkansas' corporate tax on the first $3,000 of income) to 12.25 percent (Pennsylvania's corporate tax). Many states have additional surtaxes, and allow local governments to assess their own corporate taxes on top of that.
Nevada has been fiscally conservative throughout its history. Nevadans have never had high regard for taxes. So much so, that several years ago the Nevada Legislature approved a measure that made a state personal income tax unconstitutional.
Nevada is one one of four states with no corporate income tax. Additionally, Nevada has no franchise tax, no taxes on corporate shares, and no succession tax. This type of tax structure is made possible in Nevada by a state economy centered in three major industries, namely: gaming, tourism and mining.
The revenue generated by these industries has historically paid for a substantial portion of Nevada's budget needs. Any visitor to the Las Vegas Strip can testify that Nevada's entertainment industry has poured billions of dollars into protecting its title as the entertainment capital of the world. Besides the gaming taxes generated on the casino floor, the millions of visitors add substantially to the state coffers each year in sales revenue from purchases made during their visits.
So, by incorporating in Nevada instead of California, for example, and with careful structuring that distinctly separates the Nevada source income from the California source income, you can create an entity that has its tax domicile in Nevada. This could save the business $9.300 in state corporate income taxes on every $100,000 of taxable income. What's more, your corporate structure would be in complete compliance, and legally justified.
Remember, there is a difference between "tax avoidance," which is perfectly legal, and "tax evasion," which is very illegal. Tax avoidance is avoiding situations which are taxed, while tax evasion is failing to pay taxes that are due.
The best example I know that demonstrates the difference between tax avoidance and tax evasion is in consideration of a toll bridge. Crossing the toll bridge without paying the toll would be evasion, while choosing another route, even if it adds a few miles to the trip, is simply avoidance. There is nothing illegal or immoral about it.
