Bill Text - SB476 (2010)

Clarifying the business profits tax deduction for reasonable compensation.


Revision: Jan. 19, 2010, midnight

SB 476-FN – AS INTRODUCED

2010 SESSION

10-2686

09/04

SENATE BILL 476-FN

AN ACT clarifying the business profits tax deduction for reasonable compensation.

SPONSORS: Sen. Bradley, Dist 3; Sen. Barnes, Jr., Dist 17; Sen. Bragdon, Dist 11; Sen. Carson, Dist 14; Sen. Downing, Dist 22; Sen. Gallus, Dist 1; Sen. Letourneau, Dist 19; Sen. Roberge, Dist 9; Rep. Boutin, Merr 9; Rep. Wendelboe, Belk 1; Rep. Hess, Merr 9; Rep. Chandler, Carr 1; Rep. Major, Rock 8

COMMITTEE: Ways and Means

ANALYSIS

This bill clarifies standard and burden of proof with respect to the business profits tax deduction for reasonable compensation attributable to owners of partnerships, limited liability companies, and sole proprietorships.

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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Matter which is either (a) all new or (b) repealed and reenacted appears in regular type.

10-2686

09/04

STATE OF NEW HAMPSHIRE

In the Year of Our Lord Two Thousand Ten

AN ACT clarifying the business profits tax deduction for reasonable compensation.

Be it Enacted by the Senate and House of Representatives in General Court convened:

1 Purpose. The legislature finds that:

I. Small businesses are the lifeblood of the New Hampshire economy and are the most important source of jobs for residents of New Hampshire.

II. Recent increases in audits of small businesses in which small business owners are not allowed to deduct the full and fair value of their services to their small business in determining the business profits tax liability of the business have undermined New Hampshire’s ability to provide a sound and encouraging environment for small business growth.

III. Good tax policy requires tax rules that provide taxpayers with clear guidance, encourage compliance, and enhance the competitiveness of our economy.

IV This act clarifies important business profits tax rules that apply to small businesses, eliminates costly and inefficient audits, and restores New Hampshire’s ability to encourage small business growth and the good jobs these businesses create.

2 Clarify Reasonable Compensation Deduction. RSA 77-A:4, III is repealed and reenacted as follows:

III.(a) In the case of a proprietorship, partnership, or limited liability company filing a business profits tax return as a proprietorship or a partnership, a deduction 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, provided, however, that the amount of such deduction shall not exceed such business organization’s gross business profits. The purpose of this paragraph is to permit a deduction from gross business profits of such a proprietorship, partnership, or limited liability company of all amounts that are fairly attributable to the personal services of the proprietor, partner, or member. Such amounts shall generally include all amounts reported as earned income on federal tax returns, but shall 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.

(b) A taxpayer claiming a deduction under this paragraph shall bear the burden of proving that at least one or more proprietors, partners, or members provided actual services to the business organization at any time during the taxable period. Once a taxpayer has satisfied this burden of proof, the amount claimed as a deduction shall be presumed to be reasonable, unless the commissioner proves by a preponderance of the evidence that the deduction claimed by the taxpayer is grossly excessive.

3 Applicability. This act shall apply with respect to taxable periods ending after June 30, 2010.

4 Effective Date. This act shall take effect July 1, 2010.

LBAO

10-2686

12/30/09

SB 476-FN - FISCAL NOTE

AN ACT clarifying the business profits tax deduction for reasonable compensation.

FISCAL IMPACT:

    The Department of Revenue Administration states this bill will decrease state general fund revenue and education trust 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 the purpose of this bill is to clarify standard and burden of proof with respect to the Business Profits Tax (BPT) deduction for reasonable compensation attributable to owners of partnerships, limited liability companies, and sole proprietorships. The Department states the language in this bill places the burden of proving the compensation deduction claimed on tax returns is deemed grossly excessive onto the Department, rather than having the taxpayer prove the validity of the deduction. The Department states this will result in an indeterminable decrease in BPT revenue that is deposited in the general and education trust funds.