Revision: May 11, 2011, midnight
HB 557-FN-A – AS AMENDED BY THE SENATE
17Mar2011… 0757h
05/11/11 1716s
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Matter which is either (a) all new or (b) repealed and reenacted appears in regular type.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
05/11/11 1716s
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 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 RSA 77-A:4, III is repealed and reenacted as follows: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, partnership, or limited liability company, 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 January 1, 2013.
4 Effective Date. This act shall take effect upon its passage.
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.