News   |  New Hampshire Legislators Playing Whack a Mole with Small Business and Jobs

New Hampshire Legislators Playing Whack a Mole with Small Business and Jobs

This is it. The New Hampshire Legislature is finally telling the country that we are closed for business. At least small businesses. The excuse of “closing the loophole” on taxation or equalizing the playing field has just become a farce. There is a new hammer over the head small business owners and it is in the hand of our Governor, our Legislators and some of the people who work for them.

Our elected representatives have been skipping around New Hampshire during the last couple of months, singing Bobby McFerrin’s famous song “Don’t Worry, Be Happy.” They have continued to pontificate on how the LLC tax is just “closing a loophole” and would have no effect on the vast majority of small business owners. “Really, it’s just going after the big guys and making life fair…”. Little did we know that this was just cover for a new level of small business taxation to bury any hope of employment or economic recovery.

Our representatives have now determined that $50,000 in compensation is reasonable and a dollar over that amount makes you a big bad company so here comes the loop around your neck.

As many know, for years, the DRA possessed the ability to determine “Reasonable Compensation” for business owners in New Hampshire and recently this has been the trigger to enact the new combined 13.5% small business income tax. As of late the DRA became very aggressive in applying that standard to owners of LLC’s, Partnerships and Professional Associations. If the State determines you have over compensated yourself, you have to restate your earnings, which results in a combined 13.5% new tax on both your small company and your personal income above “Reasonable.”

This new Bill (HB 1607) defines job-killing, economic-destroying conditions on small businesses. And as not to be exclusive against LLC’s and partnerships, these new rules will apply to sole proprietorships too.

This limit does not apply to each member of the company (think of a pizza shop run by a father and his two sons), it applies to the total amount of compensation. One owner, two, three, five. No matter, you are now allowed to deduct only $50,000 in compensation, total. Of course this limit also applies to all stock holders, partners, and your entire family; like siblings, spouses, ancestors and lineal descendants. Any amount in excess may be subject to the 8.5% Business Profits Tax and if you took the money home, an additional 5% personal income tax. This is in addition to paying the State Business Enterprise Tax and federal taxes. Now fortunately this does not apply to your employees, so you can pay them more than $50,000 without penalty.

Additionally, under this law, businesses will no longer be allowed to use loss carry forwards. So after you have spent years piling your money into a neat new invention, you will no longer be able to offset your compensation against all the years you lost money, ate Ramen Noodles and slept on the floor

Fortunately if you object to the “reasonableness” of the State’s position, they have included a provision that you as a business owner “bears the full burden of proof in demonstrating the reasonableness of any compensation”. Meaning that as a business owner, you have to prove to the State that you should be compensated at a higher level than an individual might reasonably earn if performing a similar service as an employee.

So with 40,000 LLC’s in our great state and tens of thousands of sole proprietorships, the current leaders in Concord don’t only want to control how much money you can compensate yourself, but they want to discourage investment into our future.

Heck of a way to pull us out of this recession and address the unemployment issue.

At a time when New Hampshire needs to be focusing on creating economic opportunities to expand the tax base and expanding the employment base, our leaders are telling small business owners to get down or they’ll whack you.

Andy Sanborn

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