Winning a project in a new state can be an important growth opportunity for a construction company.

It can also introduce financial and tax questions that may not arise when a contractor operates in only one state.

A company’s obligations don’t necessarily stop with the requirements of its home state. Where work is performed, where employees are located and how the business operates can all become relevant as the company’s geographic footprint expands.

That makes it important to consider the financial and tax implications of interstate growth before the next project begins.

Start the Conversation Before Mobilization

It can be tempting to address tax questions after a project has been awarded and work is underway.

Earlier planning gives the company more time to understand what operating in the new state could mean for both the business and its owners.

Before beginning work, contractors should talk with their advisors about the specific circumstances surrounding the project and determine which state and local requirements may apply.

The exact obligations will depend on the jurisdictions involved and the company’s activities, so this is an area where project-specific guidance matters.

Consider More Than the Business

Multi-state tax planning isn’t necessarily limited to the company’s tax return.

Depending on the business structure and circumstances, operating in multiple states may also have implications for individual owners.

That is one reason it can be helpful to consider business and individual tax planning together.

A decision that makes sense operationally for the company may create additional filing requirements or tax considerations elsewhere. Understanding those implications earlier gives both the business and its owners more time to plan.

Employees Add Another Layer

Taking a project into a new state can also mean sending employees into a new jurisdiction or hiring people locally.

Where employees perform their work can create additional payroll, withholding or other compliance considerations depending on the applicable rules.

Construction companies should make sure their accounting and payroll processes can appropriately track where work is being performed.

The more states a company enters, the more important consistent processes become.

Don’t Forget the Operational Side

Taxes aren’t the only consideration when expanding geographically.

Construction companies may also need to evaluate contractor licensing and other regulatory requirements before beginning work in a new jurisdiction.

Those requirements vary, which makes advance planning especially important.

Waiting until a project is underway to identify a missing registration, license or financial requirement can create avoidable pressure.

Make Multi-State Planning Part of Growth Planning

Entering a new market is ultimately a business decision.

Leadership may be considering the available work, competition, labor supply, project margins and long-term opportunity. Tax and compliance should be part of that same conversation.

Before pursuing work in another state, consider asking:

• What requirements could apply to the company?
• Will employees be working in the new state?
• Could the project create additional tax filing obligations?
• Are there implications for individual owners?
• Are contractor licensing or other registrations required?
• Do our current systems allow us to track activity by location?

These questions don’t necessarily mean expansion is more difficult than expected. They simply help identify issues before they become surprises.

Plan Before the First Project

For construction companies looking to grow geographically, proactive planning can make the transition into a new market easier to manage.

The goal is to understand the requirements that may accompany expansion and incorporate them into the company’s decision-making from the beginning.

HCJ CPAs & Advisors works with construction companies on multi-state tax planning for both businesses and their owners, helping contractors evaluate the financial considerations that can accompany growth into new markets.