In February 2005, the Citizens for Tax Justice published a report on State Corporate Income Taxes (2001 - 2003). The basis of the report dealt with how 252 of the top Fortune 500 companies had found ways in which to successfully reduce or eliminate their state tax liability. Interestingly:

• In 2003, 252 Fortune 500 companies had slashed their state income tax payments to only 2.3% of their U.S. profits. Two-thirds of their profits escaped state taxes entirely.

• 71 of the 252 companies managed to pay no state income tax at all in at least one of the years surveyed. This was despite telling their shareholders that they made $86 billion in pretax U.S. profits in at least one of those no tax years. 25 companies enjoyed multiple no-tax years.

• Companies such as Toys "R" Us, AT&T, Boeing, Eli Lilly and Merrill Lynch paid no net state income tax over the full three year period surveyed.

The obvious question becomes how were they able to legally accomplish such a task? These savvy corporations have learned to use the current federal, state and local laws to their fullest extent. They operate in business-friendly states that are willing to provide generous tax incentive programs to attract and maintain business. And, have learned to creatively shift their profits among states using corporate tax shelters and transfer-pricing shelters. To many small corporations, these techniques may seem complicated and costly. However, many of the basic principles employed in these legal strategies are not complicated to bring into practice for even the smallest corporation.

By law, you are allowed to incorporate your business in any U.S. state that you want. You do not necessarily have to reside or transact business in the state that you incorporate. However, do understand that there are distinct advantages and disadvantages to incorporating in a home state. You should explore all options thoroughly before deciding which option best fits your business and personal needs.

In the past few years, many businesses have chosen to incorporate in Nevada because of its business-friendly atmosphere. The fact that is a tax-free state is an added bonus. Any business would be attracted to a state that has no corporate, franchise, personal income, stock, estate, inheritance, gift or inventory taxes. Therefore for illustrative purposes, we will use Nevada as our illustration.

Nevada provides great advantages for those who actually intend to run and operate a business in the state. These advantages may be lost if you are required to register your business in your home state. It is important to keep in mind that if you are conducting business in another state, you are subject to the laws of that state in making sure your business remains compliant with regards to business licensing, tax permits, and business formation.

But, don't stop reading yet. There are ways in which you can still enjoy the tax advantages from incorporating in Nevada while residing in another state.