Revision: Dec. 15, 2009, midnight
HB 1607-FN-A – AS INTRODUCED
2010 SESSION
09/10
HOUSE BILL 1607-FN-A
AN ACT relative to the reasonable compensation deduction under the business profits tax.
This bill establishes certain requirements for the reasonable compensation deduction under the business profits tax.
This bill was requested by the department of revenue administration.
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Explanation: Matter added to current law appears in bold italics.
Matter removed from current law appears [in brackets and struckthrough.]
Matter which is either (a) all new or (b) repealed and reenacted appears in regular type.
10-2360
09/10
STATE OF NEW HAMPSHIRE
In the Year of Our Lord Two Thousand Ten
AN ACT relative to the reasonable compensation deduction under the business profits tax.
Be it Enacted by the Senate and House of Representatives in General Court convened:
1 Business Profits Tax; Reasonable Compensation Deduction. RSA 77-A:4, III is repealed and reenacted to read as follows:
III. In the case of any business organization filing a business profits tax return as a proprietorship or partnership, a deduction for an amount equal to a fair and reasonable compensation for the personal services of the proprietor, partners, or members who are natural persons actually devoting time and effort in the operation of the business organization. The business organization shall bear the burden of proof in demonstrating the reasonableness of any compensation deduction taken under this paragraph.
(a) The purpose of this paragraph is to permit a deduction from gross business profits of a business organization filing as a proprietorship or partnership, only of such amounts as are fairly attributable to the personal services of a proprietor, partner, or member and which such individual or individuals might reasonably earn if performing like services as an employee or employee-owner of a corporation so that amounts attributable to the provision of personal services are determined in the same manner regardless of the form of entity through which the business activities are conducted.
(b) A compensation deduction shall not reduce a business organization’s taxable business profits below zero for any taxable period.
(c) In determining the reasonableness of the compensation deduction claimed under this section, the business organization and the commissioner shall apply the principles of Internal Revenue Code section 162(a)(1), and relevant Treasury regulations, rulings by the Internal Revenue Service, federal court decisions, and United States Tax Court decisions.
(d) In lieu of substantiating the extent of the personal services of proprietors, partners, or members under subparagraph (c), a business organization may elect for any tax year to deduct up to $50,000 as total compensation for the tax year without a redetermination of the reasonableness of the deduction by the commissioner. Any such deduction claimed by the business organization shall not be subject to challenge; provided, that upon request, the business organization shall be required to substantiate that the proprietor or at least one partner or member performed personal services for the business organization. Related business organizations electing not to substantiate the extent of the personal services of their proprietors, partners, and members, shall be limited to a total compensation deduction of up to $50,000, less any owners compensation taken on the federal tax returns of corporate members of the group, allocated among the related business organizations. For the purposes of this subparagraph, “related business organizations” are 2 or more:
(1) Business organizations owned by members of the same family, including siblings, spouses, ancestors, and lineal descendants.
(2) Business organizations, which have in common one or more persons as owners, partners, members, beneficiaries, grantors, or shareholders.
(e) Each business organization claiming a compensation deduction under this paragraph shall provide on a schedule attached to its annual return setting forth the following information:
(1) The total reasonable compensation deduction claimed by the business organization for the tax year; and
(2) The amount of such deduction allocated to each proprietor, partner, or member actually devoting time and effort in the operation of the business organizations entitled to the deduction.
(f) The commissioner shall adopt rules under RSA 541-A relative to the administration of this paragraph.
2 Applicability. Section 1 of this act shall apply to taxable periods beginning on or after January 1, 2011.
3 Effective Date. This act shall take effect July 1, 2010.
LBAO
10-2360
12/11/09
HB 1607-FN-A - FISCAL NOTE
AN ACT relative to the reasonable compensation deduction under the business profits tax.
FISCAL IMPACT:
The Department of Revenue Administration states this bill may have an indeterminable fiscal impact on state general fund revenue in FY 2011 and each fiscal year thereafter. This bill will have no fiscal impact on state, county and local expenditures or county and local revenue.
METHODOLOGY:
The Department of Revenue Administration states this bill establishes certain requirements for the reasonable compensation deduction under the Business Profits Tax (BPT). The Department states that linking the reasonable compensation for proprietorships, partnerships, and LLCs to the federal standards used by corporations is expected to foster better compliance. The Department anticipates a de minimus increase in state general fund revenue from increased compliance. The Department further states that there could be savings in auditing costs for the Department, and taxpayers could benefit to due to the “safe harbor” of recordkeeping provisions and the added clarity regarding the BPT compensation deduction. The Department states that they can administer this bill within their existing budget.