Using LLCs to reduce your business profits tax
How to employ the ‘$50,000 floor rule’ to limit your obligation
It’s tax time, and LLCs and their members, like other New Hampshire businesspeople, are wondering what they can do to reduce their liability for the 8.5 percent Business Profits Tax.
I can’t make any suggestions here on the basis of the New Hampshire Revised Limited Liability Company Act that will help you avoid BPT you’ve already incurred, but I can make a suggestion for the future, and, as you’ll see, the revised act can be useful to you if you decide to implement my suggestion.
The BPT contains a little-known but potentially powerful loophole that New Hampshire tax people sometimes call the “$50,000 floor rule.” The BPT provision in question says that New Hampshire business organizations won’t owe BPT if their gross business profits for the relevant taxable year are $50,000 or less.
The $50,000 floor rule can be useful for New Hampshire companies that can reasonably allocate their gross income among two or more lines of business conducted by two or more separate entities. They can do this in many ways, but one way is simply on the basis of their capital equipment. To illustrate:
XYZ Inc., a New Hampshire corporation, provides specialized earth-moving services. It paid $250,000 for five custom earth movers that it uses in rendering these services. Each of these rigs grosses $50,000 or less per year.
XYZ creates five single-member LLC subsidiaries and contributes one rig to each of them. It doesn’t have to file a federal income tax return for any of these subsidiaries because, under federal tax regulations called the “Check-the-Box Regulations,” each is a “disregarded entity” for federal tax purposes. And it doesn’t have to file BPT returns for these subsidiaries because each of them is within the $50,000 floor rule.
But there are a couple of pitfalls in the above arrangement that you should know about.
• First, there’s a possibility that the New Hampshire Department of Revenue Administration will attack the arrangement on the ground that it’s merely a sham to avoid the BPT. But this attack will fail since, without question, the arrangement will have a strong non-tax purpose — namely, that of protecting each of the rigs from negligence claims and other claims arising from the operations of the other rigs.
• Second, if each of the subsidiaries distributes its profits to XYZ, the DRA may claim that XYZ owes the 5 percent New Hampshire interest and dividends tax on these distributions. But the revised act and the I&D tax statute contain specialized provisions that can be used in the operating agreements of the subsidiaries to undercut this claim. There are other available techniques that may also address I&D tax issues, such as the use of sister companies instead of subsidiaries and the use of rental and administrative payments from the subs to XYZ instead of profits distributions.
Indeed, it may make sense both for I&D tax purposes and for business asset protection purposes for XYZ to hold all of the above rigs in its own name and to lease rather than contribute them to its subsidiaries.
• The above arrangement could save you significant BPT, but these savings may be significantly offset by the added accounting and administrative costs that any multi-entity structure can generate.
The arrangements I’ve outlined work for some New Hampshire LLCs better than for others. In the end, it depends on the facts. But I hope this brief summary will at least provide you with food for thought.
Attorney John Cunningham, of counsel to the Manchester-based law firm of McLane, Graf, Raulerson & Middleton, is author of “John Cunningham on New Hampshire’s New LLC Act,” available at johncunninghamonnhllcs.com/blog and llcsforaccountants.com.