Thursday, January 21, 2010
Officials move to soften tax impact
By KEVIN LANDRIGAN
CONCORD – State tax officials moved Wednesday to relax bookkeeping and the treatment of debt in the new state tax on investment income from limited liability companies.
Revenue Commissioner Kevin Clougherty said changes to the draft rules crafted in late November came after complaints from taxpayers and accountants at three public hearings along with many individual telephone calls and e-mails.
“We have made significant changes to address the concerns we have been hearing,” Clougherty said.
Greater Nashua Chamber of Commerce President Chris Williams said the new tax on LLC investments has been a “debacle” since its inception, and these changes don’t erase the harm it will do to the business climate.
“The bottom line about this debacle is it’s bad public policy in a bad economy, which spells bad news for businesses in New Hampshire,’’ Williams said.
Former state Sen. Robert Clegg, of Hudson, claimed the treatment of owner or shareholder income under these rules goes beyond the legislative intent of the new tax.
Clegg, a co-founder of the New Hampshire Small Business and Small Industry Association, said Clougherty has “used the rules to expand the taxing authority of state government.”
Clougherty stressed that these revised rules do not change estimates the tax will apply to about 15,000 individuals who own or have shares in these companies, and it will generate $15 million a year in state revenue.
The tax is levied on any investment profit made after Jan. 1, 2009.
“We think this is an important step forward,” Clougherty said.
Last week, a Manchester law firm filed suit challenging the constitutionality of the tax’s timing since lawmakers adopted it in June but have applied it to investment profits made six months earlier.
This change in bookkeeping means individuals do not have to supply the state with the profit and loss records for their business investments made before Jan. 1, 2009, unless it’s to their tax benefit to do so.
The draft plan could have required any taxpayer to come up with records since the inception of the business.
Under the proposed rules change, debt issued from LLCs to investors is not taxable unless the parent business had profits to distribute.
Clougherty said he doesn’t believe this tax is a ‘’determining factor’’ for investors in the thousands of LLCs in the state formed to develop or own real estate.
But critics of the tax said these rule changes do not allay their claims it amounts to a new tax on the income earned, especially by closely held owners of LLCs and proprietorships.
House Deputy Minority Leader David Hess, of Hooksett, said the essential nub of opponents is it extends a traditional state tax on unearned income to the earned profit of actively working investors or individuals running an LLC.
“How are they going to decide what is profit and what is compensation? This does nothing to resolve that,” Hess said.
Nashua CPA David Heath said lawmakers at a minimum should change the LLC tax law to reflect this revised rule regarding debt.
“Regardless of the rules and how well they are written, New Hampshire still remains the only state in the Northeast that now imposes a tax on income at the business level and at the individual owner level,” said Health of Melanson, Heath and Co. based in Nashua.
“That goes right to the economic competitiveness of the state.”
A House committee took testimony Wednesday on a Hess-authored bill (HB 1661) to shelter those investor or individual owner profits from being taxed after July 1.
The Business & Industry Association supports complete repeal of tax that became part of an omnibus trailer bill that state budget negotiators endorsed during early morning negotiations last June.
“The reality is they are trying to develop rules over a law that was improperly vetted. You can’t fix bad legislation through the rule-making process,” said BIA Vice President David Juvet.
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