SBSIA in Today's Concord Monitor

State proposes altering LLC tax New rules could simplify process

By SHIRA SCHOENBERG
Monitor staff

January 21, 2010

The state Department of Revenue Administration yesterday laid out new proposed rules for the LLC tax.

Revenue Commissioner Kevin Clougherty said the changes were made as a result of public input and were aimed at simplifying the process of paying the tax.

"The proposed rules from November have been significantly changed to address the concerns raised as part of the process," Clougherty said.

Clougherty submitted the rules to the Joint Legislative Committee on Administrative Rules, which will decide whether to approve them at its Feb. 19 meeting. If so, the rules would be finalized two months before the tax is due. Taxpayers already have their interest and dividends tax forms, and the Department of Revenue Administration will likely send out another mailing with information on the change.

The law extending the state's interest and dividends tax to limited liability companies was included in the 2009 budget. There has been strong opposition from Republicans and small-business owners who say the tax will hurt the business community. They are angry that the tax never had a full public hearing, since it was adopted during the budget negotiation process.

The proposed changes seem unlikely to quell any opposition. Yesterday, Republican leaders complained that House Speaker Terie Norelli arranged a "secret meeting" between Clougherty and Democratic legislators. Business advocates said the new rules would not change their opinions.

"(The tax) needs to be heard by both the House and the Senate, and both need to vote on it," said former state senator Bob Clegg, founder of the Small Business and Small Industry Association.

Clougherty said there were three major changes made to the rules. First, to simplify record keeping, companies will only need the information that they already put on their federal tax forms. That will minimize the amount of new records companies need to keep. (Companies will need one additional record that documents compensation.)

Second, dividends are only taken out of "accumulated profits," the amount of money a company has made over time. The new rules say that when companies figure out their accumulated profits, they can start either with Jan. 1, 2009, or with the inception of the company. That means a five-year-old company that took losses its first four years can balance those losses against any gain it made in the fifth year when it figures out its profits. Companies that do not have records stretching back to their inception can simply calculate their profits from 2009.

Third, if an owner is loaned money by his corporation and distributes that money to himself or shareholders, that distribution will not be counted as a dividend. (Certain conditions must be met to ensure that the loan is legitimate.)

Clougherty emphasized that the tax will not affect most small businesses.

"Most small businesses are not taking distributions," he said. "They keep (profits) in the company as retained earnings."

The dividends tax only applies to a business owner who takes his compensation, then takes additional money for himself out of the company's profits.

Currently, 80,000 people file interest and dividend forms, and about 72,000 of them pay the tax. Clougherty estimated that the extension of the tax will add 15,000 to 20,000 paying individuals. He has estimated that the state will get an additional $15 million a year.

Despite small-business owners' claims that the added tax will hurt their businesses, Clougherty said the impact will likely be marginal.

"Not every deal in New Hampshire is so thin that this will cause someone not to invest," Clougherty said.

The Business and Industry Association has called for the tax to be repealed. Spokeswoman Adrienne Rupp said yesterday that the association could not comment on the specific rule changes.

"We feel the Legislature should start over," she said. "We've come out in support of repeal of the tax because of the whole process and confusion that was created."

Former revenue commissioner Phil Blatsos, who opposes the tax and is on the board of directors of the Small Business and Small Industry Association, said the rule changes have their own problems. For example, by using the profit numbers that companies declare on their federal tax returns, the state ends up taxing capital gains - even though legislators rejected a capital gains tax.

"It's a capital gains tax on just proprietors and partners," Blatsos said.

The idea of documenting profits since a company's inception is not possible for most small businesses, Blatsos said, since financial records by law only need to be kept for three years. That means most small businesses would have to calculate their profits beginning in 2009 - and could not account for years of losses before the tax kicked in.

Meanwhile, House Republican leaders accused Norelli of setting up a closed-door meeting with Clougherty yesterday for only the Democratic members of the Joint Legislative Committee on Administrative Rules and the House Ways and Means Committee.

"By ignoring the Republicans who serve their constituents on those vital committees, Speaker Norelli is telling the people of New Hampshire that their opinion doesn't count in this matter," said Rep. David Hess, the deputy House Republican leader. "They added this tax in the middle of the night, without a public hearing, and now they are trying to pervert the process with secret, one-sided briefings and preferential treatment."

Norelli was sick yesterday and unavailable for comment. Rep. Susan Almy, a Lebanon Democrat and chairwoman of the Ways and Means Committee, said the meeting was done with only the Democratic caucus because the tax has become so partisan.

"Because there's been so much political heat thrown at this issue, it's very difficult to have a reasonable conversation and ask questions about it in a larger group," Almy said.

Clougherty said he did not realize only Democrats were present.

"If I'm asked to go to a meeting with any elected officials, I show up," he said.

Clougherty said he was asked to come to the meeting to discuss what stage the department was in in terms of developing the rules. He told the legislators that the rules were about to be posted online. Almy said she also wanted the committees to talk to Clougherty about a House bill that addresses "reasonable compensation," the amount a business owner can take as compensation before it is considered a dividend.

The issue is related to the LLC tax because previously only corporations had to determine reasonable compensation for tax purposes and now limited liability companies will have to make the same calculation. Almy said she hopes the Legislature will pass a bill before 2009 taxes are due to give companies more definitive guidelines on how to determine reasonable compensation. But Clougherty said if that does not happen, there is a statute that addresses the issue, which will remain in place.