Lawmakers tackle ‘reasonable comp’ issue

Monday, January 10, 2011

Both the state Senate and House acted in the last week on “reasonable compensation “ -- the issue that has reared its head in the wake of the ongoing debate over taxing LLC distributions -- but it’s unclear what, if anything, will be passed, because each body has a different solution to the problem.

Now that the 5 percent interest and dividends tax on LLC distributions is likely to be repealed, the concern has quickly shifted to the increasing number of audits over what the state Department of Revenue Administration considers “reasonable compensation” to deduct against the 8 percent business profits tax.

The Senate fix – Senate Bill 497 -- passed unanimously on Wednesday, but it still will have to go though the Senate Finance Committee because of its unknown cost. That bill would simply assume that if the federal government taxes the compensation, then it is wages, not profits.

The House fix, on the other hand, barely squeaked by on Thursday. House Bill 1607 sets a $50,000 “safe harbor” that the DRA would not contest, but that harbor would be the sum of the wages of all partners in a business – a limit that critics says is far too low. They want to double the amount to $100,000, arguing that compensation should include various benefits that most employers offer their workers.

“The medium per capita income is $60,000,” said Rep. David Hess, R-Hooksett, “and most are employees that don’t have to pay their own benefits.”

But supporters argued that this is just a safe harbor, a figure that can be deducted without documentation. There was nothing that prevents claiming any amount, if those services could be documented. The amendment to double the safe harbor failed, but just by four votes.

The bill’s supporters beat back another measure that would echo the Senate fix, and put the burden of proof on the DRA. Currently, the burden of proof is too big for a small-business owners to provide without resources to hire accountants and attorneys, said backers of the change.

“Audits have gone out of sight,” said Rep. Norman Major, R- Plaistow “The number has gone up astronomically since 2004.” He said the DRA was essentially saying to business owners, “Prove to me that the compensation you’re are claiming is reasonable.”
That amendment was beaten back, but by a slightly higher margin, 151-174. In the end, the bill passed, 183-144, and was sent to the Senate.

Meanwhile, a number of other key issues affecting business were debated in the Legislature last week. Among them were:

• The House voted to repeal the law extending the rooms and meals tax to campgrounds, rejecting the arguments of House leadership, which argued that the state needs every penny it has to fund the budget. But opponents noted that the tax is bringing in much less money than the $4 million predicted, and might be costing the state revenue in other ways. The House passed the repeal, 202-125, and it now heads to the Senate.

• The House narrowly beat back a bill requiring that employees pay bank charges to cash paychecks drawn on the banks account, if the employee does not bank there – an issue that arose when it was revealed that Bank of America had been doing just that. While proponents said that if an employer chooses to use a bank that has such a policy, the employer should pay the fee, not the worker who doesn’t have a choice. But opponents said the employer has no idea how many workers will cash their check to the employer’s bank, rather than deposit it in their own, and businesses shouldn’t be required to set money aside for such an eventuality. The House killed the bill, 181-175

• The Senate approved SB 383, a bill expanding the net operating loss carryover under the business profits tax from $1 million to $10 million. This has long been a cherished goal of the Business and Industry Association, but passage came as a bit of a surprise in this tight budget environment. The bill will go straight to House, despite a fiscal note saying that that the change would result in an indeterminate, but “substantial loss in business profits tax.”

• The Senate passed a bill that would require the DRA not to tax “like kind exchanges” by limited liability companies exempted by the federal government under the 1031 section of the federal tax code. The Internal Revenue Service allows companies to delay paying taxes on the capital gains made by the sale of real property, as long as the money is used to buy other real property, even if those purchase are made by different companies, as long as all of the companies are owned by the same people. The DRA, in a “new interpretation” has been retroactively auditing and taxing deals done under differently named LLCs, billing unsuspecting taxpayers hundreds of thousands of dollars.

“These are fairly common deals in real estate,” said Sen. Lou D'Allesandro, D-Manchester. “And taxing them puts our state at a competitive disadvantage.” The Senate passed the bill onto its finance committee without any debate. – BOB SANDERS/NEW HAMPSHIRE BUSINESS REVIEW

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