Revision: April 12, 2011, midnight
HB 557-FN-A – AS AMENDED BY THE HOUSE
17Mar2011… 0757h
2011 SESSION
09/04
HOUSE BILL 557-FN-A
AN ACT relative to the standards 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.
SPONSORS: Rep. Sapareto, Rock 5; Rep. Weyler, Rock 8; Rep. Major, Rock 8; Rep. Chandler, Carr 1; Rep. Mirski, Graf 10; Sen. Gallus, Dist 1; Sen. Barnes, Jr., Dist 17
This bill modifies the standards 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Matter which is either (a) all new or (b) repealed and reenacted appears in regular type.
17Mar2011… 0757h
11-0160
09/04
STATE OF NEW HAMPSHIRE
In the Year of Our Lord Two Thousand Eleven
AN ACT relative to the standards 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.
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, eliminate costly and inefficient audits, and restore New Hampshire’s ability to encourage small business growth and the good jobs these businesses create.
2 Clarification of 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 RSA 77-A:4, III is repealed and reenacted as follows: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, under this chapter however, that the amount of such deduction shall not reduce such business organization’s tax to less than zero. 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) Subject to the provisions of subparagraph (c) which establishes a record-keeping safe harbor, one method of determining the amount of the deduction allowed under this paragraph shall be by 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) In lieu of substantiating the value of the personal services of proprietors, partners, or members, a business organization or group of related business organizations may elect, as a record-keeping safe-harbor, to deduct up to $50,000 as total compensation for the tax year;
(d)(1) In this paragraph, “record-keeping safe harbor” means that amount of compensation for personal services claimed by a business organization which does not need to be substantiated by any evidence, records, or legal or regulatory authority, except as provided in subparagraph (e).
(2) Notwithstanding subparagraph III(d)(1), the record-keeping safe harbor shall not be relevant or admissible for any purpose in determining whether a compensation deduction claimed in an amount in excess of any such record-keeping safe harbor is fair and reasonable.
(e) A business organization or group of related business organizations may elect the record-keeping safe-harbor option in subparagraph III(c) without a redetermination of the reasonableness of the deduction by the commissioner. Any such deduction claimed by the business organization or group of related business organizations shall not be subject to challenge; provided, that upon request, the business organization or group of related business organizations shall be required to substantiate that the proprietor or at least one partner or member performed personal services for the business organization or group of related business organizations.
(f) Related business organizations electing not to substantiate the extent of the personal services of their proprietors, partners, and members, shall be limited to the safe harbor deduction, 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 RSA 77-A:4, III, “related business organizations” are unitary business organizations and business organizations that would qualify as unitary but for the fact that they conduct business only within the state.
(g) 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 New Paragraph; Appeal for Redetermination or Reconsideration; Procedure. Amend RSA 21-J:28-b by inserting after paragraph VII the following new paragraph:
VIII. The department shall bear the burden of proof on any change to any compensation deduction under RSA 77-A finally determined to be due after January 1, 2011.
4 New Section; Interest and Dividends Tax; Excess Compensation. Amend RSA 77 by inserting after section 4-f the following new section:
77:4-g Dividend. Excess compensation determined by audit of the department shall not be considered a dividend under this chapter unless such determination is accepted by the Internal Revenue Service.
5 Applicability. Sections 1-2 of this act shall apply with respect to taxable periods ending after June 30, 2011.
6 Effective Date. This act shall take effect July 1, 2012.
LBAO
11-0160
Amended 04/12/11
HB 557-FN-A - FISCAL NOTE
AN ACT relative to the standards 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.
FISCAL IMPACT:
The Department of Revenue Administration states this bill, as amended by the House (Amendment #2011-0757h), will decrease state revenue by an indeterminable amount in FY 2012 and each year thereafter. There will be no fiscal impact on county and local revenue, or state, county, and local expenditures.
METHODOLOGY:
The Department of Revenue Administration states this bill would transfer the burden of proof for the business profits tax deduction (BPT) for reasonable compensation attributable to owners of partnerships, limited liability companies, and sole proprietorships to the Department. The Department states this bill would make it responsible for proving whether a deduction taken for reasonable compensation is grossly excessive. The Department states this bill will make it difficult for it to dispute a taxpayer’s compensation deduction because the Department does not have any information about the services rendered by the partnership or proprietorship. The Department states as a result, it would be ineffective to conduct an audit of a partnership or proprietorship to ensure compliance with the law. The Department of Revenue Administration states partnerships and proprietorships paid approximately $49 million in business profits taxes during tax year 2008. The Department assumes the bill would result in no partnerships or proprietorships being liable to pay the business profits tax and would result in a decrease in revenue by the same amount. In addition, the proposed bill references limited liability companies (LLC). As such, the possible loss of tax revenue could actually be greater than $49 million. In Tax Year 2008, corporations paid approximately $182 million in BPT. The Department states this $182 million could be reduced significantly as corporations become LLCs and reduce their taxable business profits. The proposed bill also excludes excess compensation from being considered a dividend under the interest and dividends tax (I&D). The Department is unable to determine the potential negative impact of this change since they do not capture information relative to what is considered excess compensation. The Department further states it can administer the law without any additional direct costs.