Bill Text - SB435 (2022)
Relative to the net operating loss carryover under the business profits tax.
Revision: Dec. 30, 2021, 2:25 p.m.
SB 435-FN - AS INTRODUCED
2022 SESSION
22-2990
10/05
SENATE BILL 435-FN
AN ACT relative to the net operating loss carryover under the business profits tax.
SPONSORS: Sen. Giuda, Dist 2; Sen. Bradley, Dist 3; Sen. Hennessey, Dist 1; Sen. Avard, Dist 12; Sen. Gannon, Dist 23; Rep. Edwards, Rock. 4; Rep. Lang, Belk. 4
COMMITTEE: Ways and Means
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ANALYSIS
This bill modifies the calculation of net operating loss carryover for determining taxable business profits under the business profits tax.
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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Matter which is either (a) all new or (b) repealed and reenacted appears in regular type.
22-2990
10/05
STATE OF NEW HAMPSHIRE
In the Year of Our Lord Two Thousand Twenty Two
AN ACT relative to the net operating loss carryover under the business profits tax.
Be it Enacted by the Senate and House of Representatives in General Court convened:
1 Business Profits Tax; Definition of Taxable Business Profits; Net Operating Loss Carryovers. Amend RSA 77-A:1, IV to read as follows:
IV. "Taxable business profits" means gross business profits adjusted by the additions and deductions provided in RSA 77-A:4 except net operating loss carryover as defined in RSA 77-A:4, XIII, and then adjusted by the method of apportionment provided in RSA 77-A:3, and then further adjusted by net operating loss carryover as defined in RSA 77-A:4, XIII.
2 Business Profits Tax; Additions and Deductions; Net Operating Loss Carryover. RSA 77-A:4, XIII is repealed and reenacted to read as follows:
XIII. A deduction for the amount of the net operating loss carryover determined under the section 172 of the United State Internal Revenue Code apportioned in the year incurred according to RSA 77-A:3. A net operating loss shall only be apportioned in the year incurred and not in the subsequent years it adjusts gross business profits.
3 Applicability. This act shall take apply to business organizations' tax years ending on or after December 31, 2022.
4 Effective Date. This act shall take effect July 1, 2022.
22-2990
Redraft 12/28/21
SB 435-FN- FISCAL NOTE
AS INTRODUCED
AN ACT relative to the net operating loss carryover under the business profits tax.
FISCAL IMPACT: [ X ] State [ ] County [ ] Local [ ] None
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| Estimated Increase / (Decrease) | |||
STATE: | FY 2022 | FY 2023 | FY 2024 | FY 2025 |
Appropriation | $0 | $0 | $0 | $0 |
Revenue | Indeterminable Decrease | Indeterminable Decrease | Indeterminable Decrease | Indeterminable Decrease |
Expenditures | $0 | $0 | $0 | $0 |
Funding Source: | [ X ] General [ X ] Education [ ] Highway [ ] Other | |||
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METHODOLOGY:
This bill modifies the Net Operating Loss Deduction (NOLD) under the Business Profits Tax (BPT). It changes the NOLD from being apportioned twice ("double apportionment") to a single apportionment in the year the NOLD is generated. The bill eliminates the outdated reference of the Internal Revenue Code (IRC in effect on December 31, 1996) so the IRC aligns with the BPT statute (the BPT statute contains the IRC in effect on December 31, 2018). The change in removing the IRC date would cap the utilization of NOLDs to 80% of taxable income and as a result, it would also cap the BPT taxable income to 80%. Lastly, the bill removes the $10 million dollar carry forward cap as well as the 10 year carry forward provision. This bill is effective July 1, 2022 and is applicable to tax years ending on or after December 1, 2022.
The Department of Revenue Administration states this bill would decrease General and Education Trust Fund revenue by an indeterminable amount starting in FY 2022. Although the fiscal impact is indeterminable, the Department was able to provide the fiscal impact for the various parts of this bill had the legislation been in place during tax year (TY) 2019.
Eliminating BPT Net Operating Loss Deduction Double Apportionment
To determine the impact of eliminating the double apportionment, the Department had to determine the revenue base using current law tax rates. To calculate FY 2022 thru FY 2024 revenues under current law, the DRA queried all TY 2019 taxpayers that utilized a NOLD and were required to apportion their income. The BPT rate for TY 2019 was 7.7%. However, the BPT rate is reduced from 7.7% to 7.6% for taxable periods ending on or after December 31, 2022. Therefore, in order to calculate an accurate base year to complete this analysis, the DRA multiplied the Adjusted Gross Business Profits of $634,174,018 for all taxpayers that utilized a NOLD and were required to apportion their income by 7.6%, arriving at a current law base of $48,197,225.
In order to calculate the impact of the proposed legislation, the DRA then manipulated the above taxpayer returns to eliminate the application of the taxpayer’s apportionment in the year the NOLD was used in accordance with the proposed legislation. To do so, the DRA added each taxpayers NOLD back into Adjusted Gross Business Profits, applied the taxpayer’s apportionment percentage, and then subtracted the taxpayer’s NOLD after apportioning. This resulted in a tax base of $394,364,513, which was multiplied by 7.6% to arrive at a new total tax liability of $29,971,703 under the proposed legislation.
The Department completed an analysis to determine the split of tax year revenue to fiscal year revenue to determine the impact of this bill. The split breakdown used for FY 2022 revenue was 15% attributable to tax year 2020, 63% attributable to tax year 2021, and 22% attributable to tax year 2022. The same split breakdown is used for FY 2023 through FY 2025. TY 2020 and 2021 are not impacted by this bill. See table below.
Estimated Fiscal Impact of Eliminating BPT NOLD Double Apportionment
Based on this analysis and assumptions it is estimated BPT revenue will decrease by $4,009,615 in FY 2022, decrease by $15,491,694 in FY 2023 and decrease by $18,225,522 in FY 2024 and each year thereafter. If this legislation had been in effect for TY 2019, 1,487 taxpayers would have been effected.
Limiting the Net Operating Loss to 80% of Taxable Income
To determine the impact of limiting the Net Operating Loss Deduction (NOLD) to 80% of taxable income, the Department had to determine the revenue base using current law tax rates. To calculate FY 2022 thru FY 2024 revenues under current law, the Department queried all TY 2019 taxpayers that utilized a NOLD. The BPT rate for TY 2019 was 7.7%; however, the BPT rate is reduced from 7.7% to 7.6% for taxable periods ending on or after December 31, 2022. Therefore, to calculate an accurate base year to complete this analysis, the Department multiplied the Adjusted Gross Business Profits of $896,166,525 for all taxpayers that utilized a NOLD by 7.6%, arriving at a current law base of $68,108,656.
The Department then manipulated the above taxpayer returns to cap the taxpayers claimed NOLD at 80% of their federal taxable income. This resulted in a new tax base of $955,985,700, which was multiplied by 7.6% to arrive at a new total tax liability of $72,654,913 under the proposed legislation.
The result was a $4,546,257 estimated increase in BPT revenue to the General and Education Trust Funds. Based on TY 2019, this would have effected 3,092 taxpayers. Some portion of this limitation on how much NOLD could have been used in TY 2019 could be carried forward into future years. The utilization of this NOLD in future tax years is indeterminable. The estimated reductions per tax year resulting from this proposed legislation are then applied according to the tax year split breakdown chart above to calculate an estimated yearly impact. Based on this analysis BPT revenue would have increased by $1,000,177 in FY 2022, $3,864,318 in FY 2023 and $4,546,257 in FY 2024 and each year thereafter. (see table below)
Estimated Fiscal Impact of Limiting the NOL to 80% of Taxable Income
Repealing the 10 Year Limitation & $10 Million Per Year Cap on NOLD Carryforward
Under current law, NOLDs can only be carried forward for 10 years and the amount that can be carried forward each year is capped at $10 million per year. Under the proposed legislation, a NOLD could be carried forward indefinitely and there would be no limit to the amount of NOLD that could be carried forward each year. The fiscal impact of uncapping the NOLD carryforward and allowing an indefinite carryforward is largely dependent on the future tax liability of each taxpayer. Said another way, the proposed changes would only have a fiscal impact if the taxpayers impacted have additional liability to offset in future years. The DRA believes that uncapping the NOLD carryforward and allowing an indefinite NOLD carryforward would result in an indeterminable decrease in revenue. However, the Department is unable to estimate the extent of that decrease due to the highly speculative nature of predicting taxpayers’ future tax liability a decade or more into the future.
The Department would need to update all necessary tax return forms and electronic management systems related to the changes contained in this bill; however, the Department anticipates this will not result in any additional administrative costs that cannot be absorbed in the Department's operating budget.
AGENCIES CONTACTED:
Department of Revenue Administration