Should LLCs be subject to the state's interest and dividends tax?
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Issue Facts
By: LFDA Editor
As of June 2009, New Hampshire based LLC owners became subject to the state’s 5% interest and dividends tax. The new tax was proposed by the Department of Revenue Administration and passed by the Legislature as part of the state budget in June.
LLCs are subject to two taxes in New Hampshire:
Business Enterprise Tax (BET): Enterprises with more than $150,000 of gross business receipts from all of their activities, or an enterprise value tax base (sum of all compensation paid or accrued, interest paid or accrued, and dividends paid) higher than $75,000 are subject to the 0.75% BET.
Business Profits Tax (BPT): Enterprises with more than $50,000 in gross receipts are subject to the 8.5% BPT.
The salary an LLC owner pays to himself is not taxed and will not be taxed under the new law provided it’s deemed "reasonable compensation."
However, LLC owners will pay the 5% interest and dividends tax on any payments to them above the amount determined to be "reasonable compensation."
The Department of Revenue Administration proposed three changes to the LLC tax on January 20.
- To minimize record keeping, companies only need the information already used on their federal tax forms.
- Dividends are only taken out of "accumulated profits," the amount of money a company has made over time. When calculating profits, companies can start either with Jan. 1, 2009, or with the inception of the company.
- If an owner is loaned money by his corporation and distributes that money to himself or shareholders, that distribution will not be counted as a dividend.
The new rules were submitted to the Joint Legislative Committee on Administrative Rules on January 20 and approved on Feb. 19.
Opponents fear the new tax law will drive small businesses out of the state. They're also upset because the law was passed without a public hearing.
Proponents say the new tax is fair, since shareholders of corporations and subchapter S corporations already pay the 5% interest and dividends tax. The new tax is expected to generate $30 million over the next two years.
The Legislature is considering two bills related to the repeal of the LLC tax:
SB 497 was recommended by the Senate Ways & Means Committee on March 3. It's headed to the Finance Committtee for further study.
HB 1607 was recommended by the House Ways & Means Committee on Feb. 9.
Wennin LLC of Manchester, a real estate holding company, has filed a lawsuit seeking an injunction to block the state from collecting the tax.