New Hampshire business tax changes for 2013
Besides new laws, compensation audit activity remains on the radar
In addition to changes to federal tax laws at the close of 2012, there were various changes to New Hampshire laws, the most significant being changes to the interest and dividends (I&D) tax.
For tax years ending on or after Dec. 31, 2013, trusts will no longer be taxed under the I&D tax. Rather, the interest and dividend income received by grantor trusts will be included on the return of New Hampshire resident grantors, which is a continuation of current law.
For non-grantor trusts, the interest and dividend income will be reported on the I&D tax return of resident beneficiaries to the extent that there is a distribution to the resident beneficiaries and the income is taxed federally as interest or dividend income to the resident beneficiary.
Even more significant are the opportunities that these changes offer to interest holders of limited liability companies, partnerships and S corporations.
For S corporations, and for LLCs and partnerships with transferrable shares, if an interest in such an entity is transferred into a New Hampshire non-grantor trust, then distributions from the entity to the trust will not be subject to the I&D tax because non-grantor trusts no longer pay the I&D tax at the trust level.
Further, subsequent distributions from the trust to resident beneficiaries will not be subject to the I&D tax at the beneficiary level either, since distributions from these entities are generally not taxed federally as dividends.
The Legislature also created a new education tax credit that can be utilized against the business profits tax and the business enterprise tax, although it is now under the microscope in Concord, where the House recently voted to repeal the credit. The matter now goes to the Senate.
Under the new law, businesses can contribute to scholarship organizations and claim a tax credit against the BPT and BET equal to 85 percent of the contribution amount. There are limits, however, to the total amount of credits available, and the business must apply to the Department of Revenue Administration before making the contribution for an allocation of the credits. There is also no carry-over of unused credits for the business organization.
Other state tax changes include:
• An increase in the net operating loss carry-over to $10 million
• An extension of the Research and Development tax credit
• An increase in the BET filing threshold to $200,000 of “gross business receipts” and $100,000 of “enterprise value tax base”
• An increase in the Section 179 deduction limit to $25,000
Finally, a warning for 2013 with respect to the reasonable compensation deduction under the BPT.
While audit activity has decreased on this issue, it has not gone away completely. In addition, the 2011 statutory changes shifting the burden to prove the reasonableness of a business owner’s compensation deduction remains relatively new with little guidance — including the requirement for business owners to keep records to substantiate the compensation deduction reported on the return.
With speculation that the Legislature may seek to increase the number of auditors in an effort to increase revenue for the state, auditing compensation records and the deduction are likely targets. Taxpayers need to continue to be proactive in supporting compensation deductions for well-paid entrepreneurs.
Here are some strategies to consider for 2013 with regards to compensation:
• Meet with your legal and accounting advisers to discuss your business outlook for 2013 – compensation expectations, audit risk and strategies on how best to support your intended compensation
• Document a performance-based compensation methodology
• For LLCs and partnerships, consider providing for guaranteed payments
• Execute an employment agreement for highly compensated employees
• Document an independent investor rate of return and implement a dividend policy to be followed at year’s end
• Perform industry research, compare expected compensation with comparative data, and document your findings.
• Consider and gather records already in existence to memorialize compensation and services informally and contemporaneously
• Call and memorialize a meeting of the board of directors, LLC managers or members or with the partnership’s partners or execute unanimous consent resolutions within the first quarter of 2013 to approve service, performance and compensation goals as well as adopt policies or agreements pertinent to 2013 compensation planning
• Consider actions to ratify 2012 compensation if not previously documented or if there were adjustments or significant fluctuations from earlier compensation planning
Remember: By assessing and enhancing compensation records in early 2013, you will be in a stronger position to overcome a compensation deduction challenge from the DRA or the IRS.
Attorney Jason Cole is a CPA and an associate of the Manchester-based law firm of Devine Millimet. He can be reached at 603-695-8566 or firstname.lastname@example.org.