Revision: May 20, 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Matter which is either (a) all new or (b) repealed and reenacted appears in regular type.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 RSA 77-A:4, III is repealed and reenacted as follows: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 05/18/11
HB 557 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 Senate (Amendment #2011-1716s), will decrease state revenue by an indeterminable amount in FY 2013 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 (BPT) deduction for reasonable compensation attributable to owners of partnerships, limited liability companies, and sole proprietorships to the Department. The Department assumes that no partnership or proprietorship need ever pay the BPT should this bill become law. The Department states some of the BPT paid was most likely paid by partnerships composed of non-natural persons. However, the exact amount of the BPT paid by those partnerships cannot be determined from the data within the Department’s current computer system. The BPT paid which could be attributable to these partnerships may still be paid to New Hampshire in the future, but not if the taxpayer chooses to have one real person who performs a service so that a compensation deduction could eliminate any taxable business profits. The bill would become effective upon passage and apply to taxable periods ending after January 1, 2013.
The Department of Revenue Administration states partnerships and proprietorships paid $49,430,000 in business profits taxes during tax year 2008. In addition, the bill includes the language “…filing a business profits tax return as a proprietorship, partnership, or limited liability company,…”. The Department states a limited liability company is a legal construct not a tax filing status. This language opens the door for limited liability companies filing as corporations to deduct personal compensation because a limited liability company can file as a proprietorship, partnership, or corporation. The impact on this language is that incorporated entities (existing corporations) could restructure as limited liability companies and thereby use the compensation deduction proposed in this bill to reduce taxable business profits. In tax year 2008, corporations paid $182 million in BPT. This amount could be significantly reduced as corporations take advantage of the change in law and become limited liability companies and reduces their taxable business profits through the compensation deduction. The Department is unable to determine the exact fiscal impact at this time. The Department further states it can administer the law without any additional direct costs.