Revision: May 14, 2010, midnight
HB 1607-FN-A – AS AMENDED BY THE SENATE
11Mar2010… 0785h
05/13/10 1859s
2010 SESSION
09/10
HOUSE BILL 1607-FN-A
AN ACT relative to the reasonable compensation deduction under the business profits tax, making distributions from limited liability companies, partnerships, and associations subject to the interest and dividends tax only if they have transferable shares, and relative to the interest and dividends tax on certain distributions to investors in investment organizations.
This bill changes certain requirements for the reasonable compensation deduction under the business profits tax. The bill makes distributions from limited liability companies, partnerships, and associations subject to the interest and dividends tax only if they have transferable shares.
This bill also establishes that investors in investment organizations shall be taxed under the interest and dividends tax only on the portion of distributions received from the investment organization which are attributable to interest and dividends.
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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Matter which is either (a) all new or (b) repealed and reenacted appears in regular type.
11Mar2010… 0785h
05/13/10 1859s
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, making distributions from limited liability companies, partnerships, and associations subject to the interest and dividends tax only if they have transferable shares, and relative to the interest and dividends tax on certain distributions to investors in investment organizations.
Be it Enacted by the Senate and House of Representatives in General Court convened:
1 Purpose. The legislature finds that:
I. Good tax policy requires clear tax law that treats similarly situated business organizations equally, responds to changing business practices, provides taxpayers with clear and simple guidance, encourages compliance, and enhances the growth of jobs and income in our state.
II. The strength of New Hampshire’s economy is based on attracting and growing small businesses that create good jobs and growth, and the state’s tax system should provide clear rules that encourage and enhance the state’s reputation as a leading jurisdiction for the creation and growth of small businesses.
III. The business profits tax statute, RSA 77-A, was put in place in 1970 to tax the profits of businesses, excluding income earned by their owners through the provision of personal services, when natural persons. The business profits tax statute has always allowed a partnership or a proprietorship to deduct an amount attributable to the reasonable value of services provided by a partner or proprietor in connection with the business when calculating its business profits tax.
IV. The interest and dividends tax statute, RSA 77, was first enacted in 1923, and recent amendments in 2009 to extend this tax to distributions from partnerships and limited liability companies resulted in inappropriate taxation of these businesses and their owners and in unintended consequences. This act will repeal this 2009 law in its entirety to restore the interest and dividends tax statute to its terms as they existed prior to the 2009 change.
V. This act will reform, simplify, and modernize important business profits tax rules that apply to small businesses and their owners, will reduce costly audits, and will restore New Hampshire’s ability to encourage small business growth and the good jobs these businesses create.
2 Business Profits Tax; Reasonable Compensation Deduction. RSA 77-A:4, III is repealed and reenacted to read as follows:
III.(a) In the case of any business organization filing a business profits tax return as a proprietorship or a partnership, a deduction of an amount equal to a fair and reasonable compensation for the personal services of a natural person who is a proprietor, partner, or member provided to the business organization, as exclusively determined pursuant to subparagraph (d).
(b) The purpose of this paragraph is to permit a deduction from gross business profits of such a business organization all amounts that are fairly attributable to the personal services of the proprietor, partner, or member, but not to permit a deduction from gross business profits of amounts that are attributable to a return on equity capital actually invested in the business organization. Such deductible amounts attributable to labor services would generally include amounts reported as earned income on federal tax returns, but would also include amounts attributable to personal services provided in connection with the operation and rental of real property, the sale of property and services, and other amounts due to services rendered.
(c) The deduction allowed under this paragraph may reduce a business organization’s taxable business profits below zero for any taxable period only if such compensation has actually been paid.
(d) The amount of the deduction allowed under this paragraph shall be determined using the standards set forth in section 162(a)(1) of the United States Internal Revenue Code, as it may be amended from time to time, and the Treasury Regulations, administrative rulings, and judicial cases issued thereunder.
3 Taxation of Interest and Dividends; Who Taxable. Amend RSA 77:3, I(b) to read as follows:
(b) Partnerships, limited liability companies, associations, and trusts, the beneficial interest in which is not represented by transferable shares, whose gross interest and dividend income from all sources exceeds $2,400 during the taxable year, but not including a qualified investment company as defined in RSA 77-A:1, XXI, or a trust comprising a part of an employee benefit plan, as defined in the Employee Retirement Income Security Act of 1974, section 3.
4 Taxation of Interest and Dividends; What Taxable. RSA 77:4, III is repealed and reenacted to read as follows:
III. Dividends, other than stock dividends paid in new stock of the partnership, limited liability company, association, or trust issuing the same, on shares in partnerships, limited liability companies, associations, or trusts the beneficial interest in which is represented by transferable shares.
5 New Sections; Taxation of Interests and Dividends; Partnerships and Limited Liability Companies. Amend RSA 77 by inserting after section 14 the following new sections:
77:14-a Partnerships and Limited Liability Companies. Partnerships and limited liability companies having a usual place of business in this state, any member of which is an inhabitant thereof, shall be subject to taxes imposed by this chapter. If any of the members of the partnership or limited liability company are not inhabitants of this state only so much of the income thereof as is proportionate to the aggregate interest of the partners or members who are inhabitants of this state in the profits of the partnership or limited liability company shall be taxed.
77:14-b Partners and Members. The tax shall be assessed on such a partnership or limited liability company by the name under which it does business, and the partners or members shall not be taxed with respect to the taxable income derived by them from such a partnership or limited liability company.
77:14-c Members of Partnership or Limited Liability Company Outside the State. An inhabitant of this state who is a member of a partnership or limited liability company having no usual place of business in this state, who receives income from such partnership or limited liability company derived from such a source that it would be taxable if received directly from such source by such partner or member, shall as to such income be subject to the taxes imposed by this chapter.
77:14-d Application of Sections. RSA 77:14-a to RSA 77:14-c shall apply, so far as apt, to associations and trusts, but not to partnerships, limited liability companies, associations, and trusts the beneficial interest in which is represented by transferable shares.
6 New Section; Investors in Investment Organizations Taxable Only on Portion of Distributions Attributable to Interest and Dividends. Amend RSA 77 by inserting after section 4-f the following new section:
77:4-g Investors in Investment Organizations Taxable Only on Portion of Distributions Attributable to Interest and Dividends.
I. In this section, “investment organization” means any organization, including a mutual fund, that limits its activities to investment activities involving some or all of the activities of acquiring, owning, holding, trading, managing, and disposing of equity or debt securities and activities incidental to or in support thereof.
II. Notwithstanding any other provision of RSA 77:4 to the contrary, an investor in an investment organization shall be taxable under this chapter only on the portion of distributions received from the investment organization that are attributable to interest and dividends of the investment organization, provided, however, that the portion of any such distribution attributable to interest from New Hampshire direct or municipal obligations and direct obligations of the United States government shall not be taxable under this chapter.
7 Repeal. RSA 77:1-a, relative to definitions, is repealed.
8 Applicability.
I. Section 2 of this act shall apply with respect to taxable periods ending on or after June 30, 2010.
II. Sections 3-5 and 7 shall apply to taxable periods ending on or after December 31, 2010.
10 Effective Date.
I. Section 6 of this act shall take effect July 1, 2010.
II. The remainder of this act shall take effect upon its passage.
LBAO
10-2360 Amended 04/06/10
HB 1607 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, as amended by the House (Amendment #2010-0785h), will decrease state general fund and education trust fund revenue by an indeterminable amount in FY 2010 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, and a $50,000 record-keeping safe harbor, for the reasonable compensation deduction under the Business Profits Tax (BPT) for taxable periods on or after January 1, 2009. To determine the fiscal impact of this bill, the Department reviewed tax year 2008 BPT returns for proprietorships and partnerships that had any BPT liability and could take the $50,000 proposed safe harbor. Using these returns, the Department calculated a decrease in BPT revenue of $6,816,377 in FY 2011; $3,245,445 from proprietorships and $3,570,932 from partnerships. The decrease in state revenue after FY 2011 is indeterminable. The Department did not estimate the impact for FY 2010 due to the uncertainty of the date of passage of the bill, and the inability to determine how many taxpayers would take advantage of the retroactive application of the provisions of the bill. The Department states they can administer this bill within their existing budget.
Since the tax provisions in this bill impact both business profits and business enterprise taxes, the revenue decrease identified would be split between state general fund revenue and education trust fund revenue in accordance with statute.