Sponsor Insight 1-28-11 

TAXES, TAXES, TAXES

Legislation has been introduced in the House and Senate to clarify the "reasonable compensation" deduction under the business profits tax.  This issue affects many small businesses such as proprietorships, partnerships, limited liability companies, and S corporations.  Current law allows an owner of a business to claim a "reasonable compensation" deduction when filing the NH business profits tax.  Any compensation above this "reasonable compensation" is subject to the NH business profits tax.  Exactly what is "reasonable compensation" is not perfectly clear, and often times requires a business owner to spend tens of thousands of dollars to prove their compensation is "reasonable."  Current law provides a "record-keeping safe harbor" of $50,000 in compensation to the partners or members of the business.  This safe harbor is the amount of compensation for personal services claimed by a business, which does not need to be substantiated by any evidence or records.  Any compensation beyond $50,000 may have to be substantiated if the Department of Revenue challenges the taxpayer.  Senator Jeb Bradley of Wolfeboro is heading up a list of 16 state senators who are co-sponsoring SB 125, which would simplify the issue for businesses.  This bill says that once a business owner proves that at least one or more of the partners provided actual services to the business, the amount they claim as compensation shall be presumed reasonable, and that the burden of proving otherwise shall be on the Department of Revenue.  The Department would have to prove "by a preponderance of the evidence" that the deduction claimed by the taxpayer is grossly excessive.  This would be a huge victory for taxpayers.  Current law requires the taxpayer to prove that the compensation is reasonable.  SB 125 has been referred to the Senate Ways & Means Committee.  No hearing has been scheduled yet.  Greater Manchester area Senators Lou D'Allesandro of Manchester and David Boutin of Hooksett serve on the Senate Ways & Means Committee.  State Representatives David Hess of Hooksett and Frank Sapareto of Derry have filed similarly worded bills in the House.  They are still in the drafting stage and have not been assigned bill numbers yet.

Bedford State Representative John Cebrowski has joined several Nashua state representatives in co-sponsoring HB 242, which would increase the net operating loss carryover under the business profits tax from $1,000,000 to $10,000,000.  Net operating losses can only be carried forward for the 10 years following the loss year.  The bill has been referred to the House Ways & Means Committee.  No hearing has been scheduled yet.  Meanwhile, Greater Manchester area Senators Ray White of Bedford and David Boutin of Hooksett have joined 10 other senators in co-sponsoring SB 126, which will do the exact same thing as HB 242.  The Senate Ways & Means Committee has not scheduled a hearing yet.

In an effort to help the very small businesses in NH, State Representative Frank Sapareto of Derry is heading up a list of House co-sponsors on HB 154, which will increase the threshold amounts for taxation under the business enterprise tax.  Current law requires any business enterprise having annual gross business receipts in excess of $150,000 or an enterprise value tax base greater than $75,000 to file a business enterprise tax return.  HB 154 will increase the threshold for gross business receipts to $200,000 and the enterprise value tax base to $100,000.  The House Ways & Means Committee will hear this bill on Tuesday, February 1 at 1:00 pm in Room 202 of the Legislative Office Building.

State Representatives Frank Sapareto of Derry and John Graham of Bedford are co-sponsoring HB 187, which would increase the carry forward periods for the business enterprise tax credit against the business profits tax.  Current law allows any unused portion of the business enterprise tax credit to be carried forward and allowed against the business profits tax due for 5 taxable periods from the taxable period in which the tax was paid.  HB 187 would phase in an increase up to 10 taxable periods over the next 5 years.  The House Ways & Means Committee has scheduled a hearing on Thursday, February 3 at 1:45 pm in Room 202 of the Legislative Office Building.

Henry Veilleux

Sheehan Phinney

Capitol Group