‘Reasonable comp’ still on the radar

Both the state Senate and House acted in the last weeks 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has a different solution to the problem.With the 5 percent interest and dividends tax on LLC distributions likely to be repealed, the concern has quickly shifted to the increasing number of audits over what the state Department of Revenue Administration considers “reasonable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 March 10, 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 March 11. 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 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 small-business owners to provide without resources to hire accountants and attorneys, said backers of the change.Bob Sanders can be reached at bsanders@nhbr.com.