News   |  New Hampshire Legislators have blood on their hands with another new jobs killing tax (and I thought the LLC tax would hurt)

New Hampshire Legislators have blood on their hands with another new jobs killing tax (and I thought the LLC tax would hurt)

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 smoking gun facing small business owners and it is in the hand of our Governor, our Legislators and some of the people who work for them.

This, while business owners wrestle with the worst recession of our lives. While we worry about how to survive in an environment with 50,000 New Hampshire residents unemployed and hundreds of thousands under employed, the state of New Hampshire has been trying to impose a Small Business Income Tax of 13.5%. Little did we know that this was, in part, just cover for a new level of small business taxation to bury any hope of employment or economic recovery.

Our elected representatives have been skipping around New Hampshire during the last couple of months, singing Bobby Mcferron’s famous song “Don’t Worry, Be Happy.” They have continued to patihicate on how the LLC tax is just “closing a loophole” and would have no effect on the majority of small business owners. Really, it’s just going after the big guys and making life fair…

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

To enact the new Small Business Income Tax also known as the LLC Interest and Dividends Tax, the Department of Revenue Administration has introduced a new Bill that re-establishes how much money a small business owner can make.

As many know, the DRA has for years, possessed the ability to determine “Reasonable Compensation” for companies in New Hampshire. Recently they have become very aggressive in applying that standard to owners of LLC’s, Partnerships and Professional Associations. That being said, 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) creates several new 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.

So by operating a small business in New Hampshire, you will be subject to several new provisions. First, The State of New Hampshire has determined how much money you can make. That limit is $50,000.00 in compensation from your company. This 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 total. Of course this limit also applies to all stock holders, partners, including your entire family like siblings, spouses, ancestors and Lineal descendants. Any amounts in excess will be subject to the 8.5% Business Profits Tax and if you took the money home, an additional 5% personal income tax. Now fortunately this does not apply to your employees, so you can pay them more than $50,000 without penalty.

Additionally businesses will no longer be allowed to use loss carry forwards. Meaning after you have spent years piling your money into your neat new invention, you will no longer be able to offset your compensation against all the years you lost money, ate Ramen Pride and slept on the floor. Just think about the entrepreneur who spends years making that new really cool product, only to find out that now they have a product to sell and make money, they cannot be rewarded for all the investment, as an offset to their income. How is this going to encourage economic development in our state?

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 feel 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 ten’s 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 and expanding the employment base, our leaders are telling small business owners to get out.

Andy Sanborn

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