Close loopholes, tax businesses fairly
As part of the state budget, legislators closed a tax loophole that applied to limited liability companies. For too long, this inadvertent tax loophole in New Hampshire’s tax system has meant that two nearly identical businesses are treated differently for state tax purposes. New Hampshire’s constitution requires that all taxpayers be treated the same — and that test wasn’t being met with this loophole in place.Republicans and Tea Party activists are now running around the state screaming that this is a new tax that will affect all small businesses. But that isn’t true, and you don’t have to just take my word for it.Richard Samuels, chair-elect of New Hampshire’s Business and Industry Association and an attorney at the McLane Law Firm, wrote a piece about closing the LLC loophole that is posted on the firm’s Web site: “The law is not a new tax. We believe that the majority of New Hampshire LLCs … are small businesses that do not make distributions to owners in the nature of taxable dividends, so those businesses simply will not be affected by the tax.”So what’s all the fuss about?Unfortunately, the fuss is mostly political, but let’s look at some of the facts and background around the closing of the LLC loophole.New Hampshire did its last major revision of its business tax codes in the early 1990s, about the same time that limited liability companies became popular. Limited liability companies were created to allow businesses to form without following some of the rules that come with corporations. LLCs weren’t created to allow investors in businesses to avoid paying state taxes, but that was the inadvertent and unfair result.What the Legislature did this year is simply close that loophole and say that dividends from corporations, partnerships and LLCs will be treated the same under New Hampshire’s interest and dividends. Closing the loophole does not impact the taxes a business pays — it relates to the taxes on dividends that investors receive.Investors will pay the interest and dividends tax on distributions received from an LLC, just like they have always had to on distributions received from corporations and some partnerships. It’s the fair, right and responsible thing to do.But this only applies to the small percentage of investors who are receiving a dividend from an LLC. It doesn’t apply to business owners who are paying themselves a reasonable salary.Let’s look at some other facts: • Extending the coverage of the interest and dividends tax to include LLCs, partnerships and associations does not affect struggling or unprofitable businesses. • The tax does not apply if businesses are taking their profits and reinvesting them in buying new equipment, expanding their companies, conducting research and development or hiring new employees. It only applies when profits are distributed as dividends to members, partners or investors. • The tax does not apply to the reasonable salaries that small business owners pay themselves. At the end of the day, most small business owners will see no change at all. • LLCs — just like corporations and partnerships — come in all shapes and sizes, small, medium and large. Closing this loophole means that returns from all businesses will be treated the same — as the constitution requires — no matter how they are registered.In short, as Mr. Samuels wrote: “It can fairly be stated that the tax does not spell an end to New Hampshire LLCs, it is not unfair, and it will not put New Hampshire LLCs at a competitive disadvantage to LLCs operating in other states.”Democrat Tom Katsiantonis represents Manchester in the New Hampshire House.