Moment of truth for 'reasonable comp'?



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Will New Hampshire lawmakers try to address the thorny issue of "reasonable compensation" today as part of a repeal of the so-called LLC tax, or will they forget about it and slip that LLC tax into the budget fix-it bill?That's the question most business lobbyists will have as they watch today's legislative session at the State House. Lawmakers slipped the LLC tax – or rather the extension of the interest and dividends tax to LLC distributions -- into a budget compromise about this time last year, as an attempt to balance budget. But the spotlight thrown on the tax change illuminated a problem that has been festering for years, thanks to increased auditing by the state Department of Revenue, when it comes to reasonable compensation. If LLC owners aren’t able to expense their compensation out as wages, the new LLC tax could prove a double whammy. They would have to pay a hefty business profits tax at 8.5 percent, as well as pay a 5 percent tax on those LLC distributions -- a 12.5 percent hit they have argued.After protests from across the business community, it became clear that the LLC tax would become history – especially since it wasn’t raising much money anyway. But the question remained: would the repeal drag along reasonable compensation reform?There were two attempts to tackle this -- Senate Bill 497 and House Bill 1607. When they started out, both chambers looked to the IRS for guidance, both repealed the LLC tax and both came up with some kind of safe harbor, a certain amount of compensation that would be unquestioned.The House version was very straightforward, if not very generous: $50,000, and not just for the individual but entire company. Thus, if there were two partners, their safe harbor might consist of only $25,000 each.The Senate version was more complicated. It didn’t give a number, but would allow deductions for the "independent investor risk rate." A one-person plumbing LLC would be able to deduct what the amount it would pay a plumber as well as all those intangibles that make up the managing of a business. But shortly before the bill went to the House Ways and Means Committee, the Department of Revenue Administration increased its estimate of how much the Senate safe harbor would cost the state from $15 million or so to $341 million. The Business and Industry Association of New Hampshire protested that it was more than the state takes in through the tax, but the Ways and Means, which desperately needs every million it can get to balance the budget, sliced that out of the bill.
Indeed, hoping that the LLC tax would be an inducement for voting for the budget, the committee took the repeal out as well, leaving in the IRS language -- and, for good measure, the safe harbor that had been in HB 1607.That’s because the Senate stripped that safe harbor away in HB 1607, and didn’t put in its own "independent risk rate.". The Senate did, however, leave the LLC repeal in and the IRS guidance in. So the $50,000 safe harbor is the only one remaining – now in SB 497. but that safe harbor may not be safe, because the latest DRA price tag on that has grown to $7 million.Tomorrow, the House has to decided if it will accept, reject or try to work out a deal on the Senate changes, and vice versa. Both sides agree in principle on the repeal, and using the IRS guidance on reasonable compensation, but what actually survives is anyone’s guess."That is the big question," said David Juvet, vice president of the BIA. "I hope everyone will remain calm, and one of them survives to conference committee." -- BOB SANDERS/NEW HAMPSHIRE BUSINESS REVIEW

 

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