Revision: April 13, 2010, midnight
SB 497-FN-A – AS AMENDED BY THE SENATE
03/24/10 1142s
2010 SESSION
09/10
SENATE BILL 497-FN-A
AN ACT changing the business profits tax deduction for reasonable compensation for partnerships, limited liability companies, and sole proprietorships and modifying the interest and dividends tax statute to follow the definitions of interest and dividends used in the United States Internal Revenue Code.
SPONSORS: Sen. D'Allesandro, Dist 20; Sen. Odell, Dist 8; Sen. Downing, Dist 22; Sen. Gallus, Dist 1; Rep. Campbell, Hills 24; Rep. W. D. Scamman, Rock 13
This bill changes the business profits tax deduction for reasonable compensation for partnerships, limited liability companies, and sole proprietorships and modifies the interest and dividends tax statute to follow the definitions of interest and dividends used in the United States Internal Revenue Code.
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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Matter which is either (a) all new or (b) repealed and reenacted appears in regular type.
03/24/10 1142s
10-2899
09/10
STATE OF NEW HAMPSHIRE
In the Year of Our Lord Two Thousand Ten
AN ACT changing the business profits tax deduction for reasonable compensation for partnerships, limited liability companies, and sole proprietorships and modifying the interest and dividends tax statute to follow the definitions of interest and dividends used in the United States Internal Revenue Code.
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 rules that reflect modern business and tax practices, provide taxpayers with simple and clear guidance, encourage compliance, and enhance the competitiveness of our economy.
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. RSA 77, the interest and dividends tax statute, was originally enacted in 1923 and its provisions do not reflect modern economic and legal practices.
IV. This act will reform, simplify, and modernize important business profits tax and interest and dividends tax rules that apply to small businesses and their owners, will eliminate costly and inefficient 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 determined pursuant to the general rule of subparagraph (b) and the reporting safe harbor rule of subparagraph (c); 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 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 rate of return on net equity capital actually invested in the business organization. Such amounts 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.
(b) Subject to the provisions of subparagraph (c) which establishes a reporting safe harbor, 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.
(c)(1) Amounts described in subparagraph (2) with respect to any taxable period shall be treated as attributable to the provision of personal services to the business organization by a proprietor, partner, or member. A business organization may elect the reporting safe harbor set forth in subparagraph (2) by specifying its election on its annual return required to be filed pursuant to RSA 77-A:6, I. The amount of the deduction reported pursuant to the safe harbor set forth below shall not be subject to redetermination or adjustment by the commissioner; 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.
(2) For any business organization filing a business profits tax return as a proprietorship or partnership, if the business organization has gross business profits determined after applying the additions and deductions required by RSA 77-A:4 but before application of this subparagraph equal to or greater than the independent investor return amount, then the business organization may deduct all amounts of such adjusted gross business profits in excess of such independent investor return amount.
(d) The principles stated in subparagraphs (b) and (c) shall apply similarly to all business organizations regardless of their form of organization.
3 New Paragraphs; Business Profits Tax; New Definition; Independent Investor Return Amount; Actual Total Capital. Amend RSA 77-A:1 by inserting after paragraph XXIX the following new paragraphs:
XXX. “Independent investor return amount” means the amount that an independent investor would realize as an investment return on the actual total capital invested in the business organization, assuming that a single independent investor contributed all of the actual total capital and required an investment return determined using the independent investor risk rate per annum applicable for the taxable period, computed on a simple interest basis. The independent investor return amount shall be determined on a cumulative basis so that if gross business profits determined after applying the additions and deductions required by RSA 77-A:4 but before application of RSA 77-A:4, III are less than the independent investor return amount for a taxable period ending after June 30, 2010, the portion of the independent investor return amount that is not reported as taxable business profits for such taxable period shall be carried forward to subsequent tax periods.
XXXI. “Independent investor risk rate,” with respect to any taxable period, means the long-term annual applicable federal rate specified in section 1274(d) of the United States Internal Revenue Code, as it may be amended from time to time, as in effect for the September that is included within such taxable period, plus 15 percentage points.
XXXII. “Actual total capital” means the net equity value for the business organization measured at the beginning of each applicable taxable period. For a business organization required to file a federal partnership information return, the actual total capital shall be the amount of the organization’s aggregate partners’ capital account as reported on its federal partnership information return. For all other business organizations, the actual total capital shall be determined by reference to the organization’s aggregate net owners’ equity amount using principles similar to business organizations required to make and file a United States partnership return of income.
4 Taxation of Interest and Dividends. RSA 77:1 is repealed and reenacted to read as follows:
77:1 Imposition of Tax. A tax is imposed at the rate of 5 percent upon the interest and dividend income of every taxable individual.
5 Taxation of Interest and Dividends; Definitions. RSA 77:1-a is repealed and reenacted to read as follows:
77:1-a Definitions. In this chapter:
I. “Taxable individual” means any individual who is an inhabitant or resident of this state for any part of the taxable year.
II. “Dividend” means any item of federal gross income which is treated as a dividend under the provisions of the United States Internal Revenue Code.
III. “Interest” means all amounts treated as interest under the provisions of the United States Internal Revenue Code, except interest from notes or bonds of this state and notes and bonds of any political subdivision of this state.
6 References Deleted. Amend RSA 77:4-b to read as follows:
77:4-b Interest and Dividend Income of Employee Benefit Plans and Tax Deferred Investments Not Taxable. [Notwithstanding any provisions of RSA 77:4 to the contrary,] Interest and dividend income received by an employee benefit plan as defined by the Employee Retirement Income Security Act of 1974, section 3, or any successor act enacted for the purpose of regulating employee benefit plans, or an individual retirement arrangement, Keogh plan or any other arrangement pursuant to which payment of federal tax on the income thereof and of the plan sponsors, participants and beneficiaries is deferred, shall at no time be considered taxable income under [RSA 77:4] this chapter, either to the plan or arrangement or to its sponsors, participants or beneficiaries, irrespective of when or whether all or any portion of such income is accumulated or expended for the benefit of, or distributed in any form or manner to, such sponsors, participants or beneficiaries.
7 Reference Deleted. Amend RSA 77:4-d to read as follows:
77:4-d Dividends Earned on Certain Mutual Funds and Distributions Received on Unit Investment Trusts Not Taxable. [Notwithstanding any provisions of RSA 77:4 to the contrary,] The dividends earned by an investor in a mutual fund or the income earned or distributions received by an investor in a unit investment trust which invests solely in New Hampshire tax-exempt tax anticipation notes, bond anticipation notes and other instruments exempt under New Hampshire law shall not be taxable under this chapter.
8 Reference Deleted. Amend RSA 77:4-e to read as follows:
77:4-e Interest and Dividends From Funds Invested in College Tuition Savings Plan Not Taxable. [Notwithstanding any provision of RSA 77:4,] Income and distributions from any qualified tuition program as defined in the Internal Revenue Code of 1986, as amended, shall not be taxable under this chapter to the plan or to its sponsors, participants, or beneficiaries to the extent that the same is exempt from federal income taxation under section 529 of the Internal Revenue Code of 1986, as amended, as that section was in effect on July 1, 2003.
9 References Changed. Amend RSA 77:18, II to read as follows:
II. At the same time the return is filed, as required by paragraph I of this section, every [taxpayer] taxable individual as defined in RSA [77:3] 77:1-a, I shall, in addition, file a declaration of its estimated tax for its subsequent taxable period; provided, however, that if the estimated tax is less than $500, a declaration need not be filed; and provided further that a declaration shall be filed at the end of any quarter thereafter in which the annualized estimated tax exceeds $500.
10 Reference Deleted. Amend RSA 77:24-b to read as follows:
77:24-b Corrections. Each taxpayer shall report to the commissioner of revenue administration any change in the amount of the taxpayer’s income [as defined by RSA 77:4] as finally determined by the United States Internal Revenue Service with respect to any beneficial interest for which the taxpayer has made a return under this chapter. Such a report shall be made not later than 6 months after the taxpayer has received notice that such change has been finally determined. Notwithstanding any other provision of law, a taxpayer reporting a correction pursuant to this section shall be given notice by the department of any adjustment to the tax due with respect to such correction within 6 months after the filing of the report.
11 Reference Changed. Amend RSA 77-A:5-b, II(b) to read as follows:
(b) The names, addresses, and federal taxpayer identification numbers of the holders of such qualified investment company and the amount, if any, of their proportional share of the income required to be included in such holder’s New Hampshire tax return under RSA [77:4, V] 77 and RSA 77-A:4, XV.
12 Reference Changed. Amend RSA 391:3 to read as follows:
391:3 Taxability. A common trust fund shall not constitute a taxable entity within the meaning of RSA 77. Each estate having a participating interest in a common trust fund shall include in its return its proportionate share of any taxable income [of the classes described in RSA 77:4] under RSA 77, received by such common trust fund, whether or not such income is distributed by the common trust fund.
13 Repeal. The following are repealed:
I. RSA 77:3, relative to taxable persons.
II. RSA 77:3-a, relative to limited liability companies.
III. RSA 77:4, relative to taxable income.
IV. RSA 77:4-c, relative to transferable shares.
V. RSA 77:6, relative to income from pledged property.
VI. RSA 77:7, relative to capital distribution.
VII. RSA 77:8, relative to certain non-taxable income.
VIII. RSA 77:9, relative to decedents’ estates.
IX. RSA 77:10, relative to income from trusts.
X. RSA 77:11, relative to accumulations.
XI. RSA 77:12, relative to nonresident trustees.
XII. RSA 77:13, relative to guardians.
XIII. RSA 77:17-a, relative to small business corporation reports.
14 Applicability.
I. Sections 2-3 of this act shall apply with respect to taxable periods ending on or after June 30, 2010.
II. Sections 4-13 of this act shall apply with respect to taxable periods ending on or after December 31, 2010.
15 Effective Date.
I. Sections 2-3 of this act shall take effect June 30, 2010.
II. Sections 4-13 of this act shall take effect December 31, 2010.
III. The remainder of this act shall take effect 60 days after its passage.
LBAO
10-2899 Amended 04/13/10
SB 497 FISCAL NOTE
AN ACT changing the business profits tax deduction for reasonable compensation for partnerships, limited liability companies, and sole proprietorships and modifying the interest and dividends tax statute to follow the definitions of interest and dividends used in the United States Internal Revenue Code.
FISCAL IMPACT:
The Department of Revenue Administration states this bill, as amended by the Senate (Amendment #2010-1142s), will decrease state general fund revenue and education trust fund revenue 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 (DRA) states this bill changes the business profits tax (BPT) deduction for reasonable compensation for partnerships, limited liability companies (LLC), sole proprietorships, and corporations and modifies the interest and dividends tax statute to follow the definitions of interest and dividends used in the United State Internal Revenue Code. DRA assumed the BPT provisions in this bill applied to all business organizations regardless of their form of organization, including corporations. DRA further assumed due to the applicability and the effective dates, this proposed legislation would impact all calendar year 2010 BPT, business enterprise tax (BET), and interest and dividend tax returns.
Business Tax Impact |
|
Business Profits Tax | |
Corporations |
($254,992,277) |
Partnerships |
($53,585,712) |
Proprietorships |
($17,974,717) |
BPT Tax Loss |
($326,552,706) |
Business Enterprise Tax | |
BET Tax Loss |
($2,449,145) |
Total Business Tax Loss |
($329,001,851) |
Business Profits Tax impacts: The Department computed the fiscal impact of this bill by inventorying the entire population of partnerships and corporations that paid BPT, indentified the taxpayers paying the majority of the tax, physically inspected those returns and applied the provisions of this bill to those tax returns. The organizations that paid the most tax were used as a test of the impact the independent investor return amount would have on the gross business profits. DRA determined that the independent investor return amount provisions in the bill would eliminate the BPT tax for 80% (58,880 of 74,052) of BPT taxpayers, while the amount of BPT generated by the remaining 20% of taxpayers would be relatively small.
Business Enterprise Tax impacts: The Department states the independent investor return amount safe harbor is not based on reasonable compensation for the services performed by a member of partner, but based on investment criteria. DRA, therefore, believes taxpayers using the independent investor return amount safe harbor would no longer pay BET for a substantial portion of their earnings, and BET would be reduced accordingly.
Interest and Dividends Tax impacts: The Department states using tax year 2007 federal data for partnerships (K-1s) and form 1099s, the Department determined interest and dividends tax loss based on the provisions in this bill would be at least $13,412,114.
Since the tax provisions in this bill include impacts to 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. The provisions of this bill can be administered within the Department’s existing budget.