Tax Tips for California Entrepreneurs Moving to Texas

Newly arrived in Texas by way of California? There’s a strong influx of California transplants to the area, particularly among entrepreneurs. If you’re among them, welcome! But fair warning: Leaving the state doesn’t necessarily mean you’ll stop paying California taxes.

Entrepreneurs love the Lone Star State’s business-friendly policies. Ranking high among them: No corporate or personal income taxes. It’s one of the main reasons many California business owners are flocking to the state. A recent Stanford study found that Texas beats every other state as a destination for California companies by a ratio of 4:1.

Simply leaving California behind, though, won’t necessarily put an end to your income tax obligations. Forbes’ Robert W. Wood offers an entertaining take on the issue here. In short, California has aggressive residency criteria. If you’re there for more than nine months (and sometimes as little as six months), you’re presumed to be a resident. Yet, once outside the state, it usually takes 18 months to be presumed no longer a resident—and that’s if you sever practically all ties with the state.

If you leave, California’s Franchise Tax Board (FTB) may chase you down to probe how and when you stopped being a resident. And, as Wood points out, “The burden is on you to show you are not a Californian.”

The Austin Business Journal recently opined how this scenario could play out for California transplants in Texas. The article speculates that keeping a California home after you’ve moved could lead to tax headaches, particularly if the California home is more expensive than your Texas home (which is likely) or you haven’t purchased a Texas home yet (and are renting instead). If you’re a high-profile individual, tax collectors may even monitor your social media usage “to ensure that those who said they’d left the state aren’t posting frequently from California,” the article states.

“About 700 auditors are employed by [the FTB],” Bloomberg Wealth adds. “For many of them, the sole job is to check on taxpayers who have claimed to have left the state. Residency audits can take years to complete, and include scrutiny of business relationships, family and community ties, and the location of prized possessions like artwork and heirlooms.”

A final “fun fact”: While the IRS has a limited amount of time to audit filed tax returns, California loopholes could mean a limitless auditing window. If an IRS audit changes your tax liability, for instance, you are obligated to notify the California FTB within six months. “If you fail to notify the FTB of the IRS change to your tax liability, the California statute of limitations never runs. That means you might get a billing ten or more years later,” Wood explains.

He offers a checklist for ex-Californians that may help you escape the ire of the California FTB. Applying for a new driver’s license, moving your car registration and insurance, switching your voter registration location, and other tips are good items to complete after any move, but they’re critical from a tax standpoint if you suspect California may question your new residency status. See those tips and more here. And for additional questions, feel free to contact us.

Photo from 123rf.com

September 21, 2021

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