Tax Upstreaming

Tax upstreaming is a money-saving strategy whereby a C-corporation domiciled in one state "upstreams" its income to another company in another state. If done right, the company can avoid paying state income tax in its home state. The strategy is most effective when upstreaming to a company in a state with no income tax, like Nevada.

For example, say you live in a state with a maximum income tax rate of 13.3% (we're looking at you, California). In that state, $100,000 of business income means $13,300 in state taxes. If you shift that income to a state with no income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming—and New Hampshire and Tennessee, sort of). Here's where the math gets easy. Your savings is $13,300 – $0 = $13,300. That’s a big chunk of change.

Of course it is not as simple as just transferring funds. If it were that simple, everyone would already be doing it. Additionally, there is more than one way to do it. You can divide the active from the passive streams of income, for example. And it doesn't make sense in all situations. No matter how it's done, though, it has to be carefully documented so an audit reveals the legitimacy of the strategy.