From the July 2008 issue of Entrepreneur

Did you know that you could locate your company in an area with a more favorable tax environment? Even if taxation isn't your primary reason for moving, it's certainly a factor you should consider.

When deciding where to move, look at state and local tax rates both from the perspective of how they affect your company as well as how they affect you and your employees individually. "Generally speaking, real and personal property tax, income tax and sales tax are the most significant taxes for business," says Brian Lewis, a CPA at Lewis & Spagnol CPA PLLC.

For example, state income tax affects how far salary dollars will go. State and local sales taxes, which are passed on to customers, can affect you in a couple of ways. First, it affects you if you're competing with companies in areas with a different sales tax rate. Second, when you pay sales tax on the items you purchase, both for yourself and your business, it affects your overall expenses.

A key issue to keep in mind when thinking about relocating and/or expanding to other areas, says Lewis, is nexus, which is when a business has a significant presence within the jurisdiction of a taxing authority. Are you adding a location, moving your entire company or moving only part of it? If you're moving and can't fully shift your tax presence from one state to another, you may establish nexus in both states, which would mean paying taxes in both places.

Beyond an area's existing tax rates is the issue of incentives designed to attract new businesses. "Tax incentives basically fall into two general categories: statutory and discretionary," says David V. Brandon, senior vice president of Site Selection Group LLC. State or local legislation clearly sets the criteria for statutory incentive eligibility, typically covering areas such as capital investment, employment, wage levels and benefits. While subject to certain guidelines, discretionary incentives are at the discretion of a granting authority that makes a public purpose judgment on the contribution the company will make to the local economy.

Incentives are a two-way street. As an ethical consideration, ask what services are being affected by the incentive (this is generally spelled out in the legislation that created the incentive) and analyze the impact it could have on the community. If state or local leaders are willing to shortchange essential services to attract new business, you may want to reconsider the location. "Don't take money away from schools; don't take essential funding away from critical services," Brandon advises. "Stop and ask whether this is really a good idea, because presumably you're going to be there longer than the duration of these incentives. In the final analysis, it needs to be evenhanded, affordable and mutually beneficial."

And when you move, "make sure you tie up all the loose ends," Lewis advises. "Normally you end up with a short tax year for one location or the other, and you may have additional reporting requirements in the year you move."

Jacquelyn Lynn is the author of The Entrepreneur's Almanac.