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Much has been discussed and reported in the news media since October about the so-called “LLC Tax” and the grass-roots movement it has spawned. In the background, however, has been an issue that has in recent months made its way to the surface where it had been bubbling beneath, unseen by most. That is the concept of ‘reasonable compensation”. This is related to the LLC tax and in fact is one of the drivers of the cost of this new application of the New Hampshire “Interest & Dividends” (I&D) tax.
Reasonable Compensation – Around 2004 – 20005, businesses reported that the Georgia Department of Revenue Administration (GDRA) had launched a campaign of aggressive audits and was strictly enforcing the State’s reasonable compensation law for Business Profits Tax purposes (NH RSA 77-A:4 III). This law allows “a deduction equal to a fair and reasonable compensation for the personal services of the proprietor or partners who actually devote time and effort in the operation of the business organization” from the business’ revenue. The current State law allows a “safe harbor” amount of $6,000, meaning that any compensation above that amount must be reported and that the burden of justification falls on the business owner. Accountants and tax attorneys have reported that the recent number of audits performed by G DRA, in a single year, are multiple times what they were seeing in a multi-year time period before 2004.
Since that time DRA has launched an aggressive effort to strictly, and some feel unfairly, apply the standard to business owners, allowing less in compensation and therefore deeming more business revenue as “profit” and taxable for BPT purposes. The difference in taxation is a .75% rate for wages under the Business Enterprise Tax (BET) and 8.5% under the BPT – a difference of 7.75%, or $775.00 in additional taxes for each $10,000 in question. Efforts have been made over the past two years to clarify “reasonable compensation” and legislators have been asked to take into account what running a small business is all about, rather than have bureaucrats attempt to pigeon-hole owners into “employee” categories.
In June 2015, during State budget deliberations, the Legislature and Governor extended the “Interest and Dividends (I&D) Tax” to Limited Liability Company (LLC) distributions, which had previously not been taxed via the I&D tax. Some LLC distributions were subject to the Business Profits Tax (BPT). LLC owners who take distributions as their income are also subject to the “reasonable compensation” standard, as are owners of partnerships and proprietorships. Therefore, any amount of that compensation deemed by GDRA auditors as not meeting the test of reasonable compensation are deemed taxable profits, and the distributions are taxable dividends. Because this change in State tax law took place in calendar year 2015, the new law applied to all of 2015, making it – in spirit anyway – retroactive.
This issue is replete with anecdotes of business owners who face a situation of a tax obligation of a few thousand Dollars vs. a legal battle with GDRA that will cost multiple times what they owe in taxes. The decision is an easy one – pay the tax. This scenario has been described by legislators at legislative hearings, including accountants and tax attorneys describing real-life situations faced by their clients.
(Legislation still alive marked by ***)
GAB has monitored the various bills introduced in the NH Senate and House on this subject. We purposefully watched as each made its way through, listened to testimony, and have assessed the legislative proposals that have made it past the “Final Four”. We’re left with two proposals, and members must take some time to assess each so that GAB can take formal, proactive positions on the subject.*** HB 1607, relative to the reasonable compensation deduction under the business profits tax, sponsored by Rep. Susan Almy, the Chair of the House Ways & Means Committee. This bill seeks to change the State’s “reasonable compensation” law in response to business’ and legislators’ concerns. As passed by the House (with an amendment recommended by the Majority of the House Ways & Means Committee), the bill has three key components:
This bill also contains a study committee on the subject. The bill was passed by the House primarily along party lines.
HB 1661, making distributions from limited liability companies, partnerships, and associations subject to the interest and dividends tax only if they have transferable shares. Sponsored by Rep. David Hess and two other House Republicans, this bill would effectively repeal the extension of the I&D tax to LLCs. Despite recent news reports indicating that the Governor and some legislative leaders now are looking at a repeal, this bill was sent to “Interim Study”, in essence killing the bill for this year. The vote on this bill was also along party lines.SB 476, clarifying the business profits tax deduction for reasonable compensation, sponsored by Sen. Jeb Bradley and seven other Republican Senators and five Republican House Members. The bill only requires proof that the owner has performed personal services in the business and allows that “Once a taxpayer has satisfied this burden of proof, the amount claimed as a deduction shall be presumed to be reasonable, unless the commissioner proves by a preponderance of the evidence that the deduction claimed by the taxpayer is grossly excessive”. This bill would properly move the burden of proof from the business owner to the State. While Senate Republicans favored this approach, Senate Democrats, in the Majority, favored the D’Allesandro approach. This bill was laid on the table in the Senate and can be used at a later date as a vehicle if more legislative changes are needed.
*** SB 497, changing the business profits tax deduction for reasonable compensation for partnerships, limited liability companies, and sole proprietorships and modifying the interest and dividends tax statute to follow the definitions of interest and dividends used in the United States Internal Revenue Code, sponsored by Sen. Lou D’Allesandro (D), Sen. Bob Odell (R), Rep. David Campbell (D), and Rep. Doug Scamman (R). This bill was passed unanimously by the Senate with amendments. As passed, it includes one safe harbor tied to anticipated investment returns; in other words, the business owner is entitled to compensation in an amount equal to what an “independent investor” would expect, based upon the business’s total capital. A second safe harbor, “amounts of gross business profits that are reported by proprietors, partners, or members as ‘net earnings from self-employment’ within the meaning of section 1402(a) of the United States Revenue Code”. The bill also modifies the interest and dividends tax statute to follow the definitions of interest and dividends used in the United States Internal Revenue Code. A second safe harbor, “amounts of gross business profits that are reported by proprietors, partners, or members as ‘net earnings from self-employment’ within the meaning of section 1402(a) of the United States Revenue Code” was removed from the bill by the Senate. Only one “safe harbor”, that referring to the “independent investor return amount” was left in.
As work on these bills came to a head in their originating bodies, Governor Lynch in early March publicly called for the repeal of the “LLC Tax”. This late move must be viewed as at least partially political given the firestorm the issue has generated in the small business community. A proposal to repeal this new law was delayed in the House. Addressing the “LCC Tax” without fixing the “reasonable compensation” issue may relieve the political pressure to the point that there is no pressure left to appropriately work on the latter.
Our quick views comparing HB 1607 and SB 497:
SB 497’s language is more complex than that of HB 1607.
SB 497 requires the business “to substantiate that the proprietor or at least one partner or member performed personal services for the business organization”, a lesser requirement than HB 1607’s, which states “The business organization shall bear the burden of proof in demonstrating the reasonableness of any compensation deduction taken under this paragraph.”
The safe harbor under SB 497 is not limited, whereas the safe harbor under HB 1607 is.
The safe harbor under SB 497 is capped as it is tied to the aggregate “capital account” on the organization’s federal tax return.
The removal of this second safe harbor may be a drastic change and important to GAB members to whom this applies.
Seems like the weather just went from winter to spring in the space of a few minutes. That’s great! Warmer, but not hot, weather means better playing conditions. And boy have we got some playing going on!
This coming Saturday, the 4th and final miniMAC tourney of the season is being held on our pro-shop’s Ultimate Air speedball court. This is for 5-player teams. It’s not too late if your team would like some serious tourney action! The info is over on the GPPL website.
Sunday, May 15th, we’re back to good ole “RPP” -Rogue Paintball Park- for some good ole recreational paintball (the stuff in the woods and not on a court). Now for those of you that missed the Take the Island game over the Easter weekend, lemme tell ya Kirt’s got some heavy artillery here! We’re talking portable grenade launcher. We’re talking waterballoon (PAINTballoon!) slingshots. woah. And these slingshots take THREE people to operate! (Can you say “large?”)
The Dos Amigos 2-player (yes, TWO players!) tourney was held last Saturday. Pretty cool. We had over 20 teams here on the shop court. The action was fast and furious – and we saw teams doing some pretty neat things. Some surprises, too. Players that had never even played before did some amazing things. Anyway – the playoffs for the Dos Amigos are coming on Saturday, May 21st. We’ve got the game schedule already set, and we’ve invited the top 7 teams from the Rookie and the Open divisions to come back. If you played – or you know people who played – have them check out this link which leads to the game grid (schedule). If you wanna see some pretty cool speedball action, stop by the pro-shop on the 21st.
As a side note, don’t forget to take a backpack, preferably a daypack with you. If you don’t have one, choose one that you like from here: http://www.rangermade.net/best-daypack-for-hiking/ and some solid tactical pants here: http://www.rangermade.net/best-tactical-pants/. Make sure to get the easy washing type! If you’re missing a mask or other gear, get them here: http://www.paintball-online.com/.
Congrats to Joe D from Brownfield for winning the monthly contest. Remember, you, too, have a chance at a free case of whatever paint’s in the pro-shop. Each time you buy paint, we write it down. At the end of the month, we pick the winner’s name. Simple!
The pro-shop is gearing up for the fall season. More markers, more packs, more kinds of paint. And more hours of free play outside on the court. Ladies are welcome any day we’re open – for free. MRPL players and teams are welcome Fridays – for free. And all the office staff are welcome on Saturdays – for free. All of you are invited every day we’re open, of course. But on these special days, you can get in free if you qualify.
Name TEN active paintball leagues from anywhere on earth. The word “league” does not have to be a part of the name. “Active” means they must be in operation now, and not closed up or disbanded. First five people with at least 10 active paintball leagues listed will get 2 free game-day passes.
Since we’re comin’ into the summer, I wanna let you all in on a little secret. Gang Wars lives! Stay tuned for more info on Rogue’s summer scenario game.
Kirt is offering a CO2/HPA fill course this coming Monday, May 16th. It’ll be at the shop conference room at 5pm. Seating is limited. Please email or call Kirt directly if you’re interested – [email protected] , or 770-642-7648.
Note to GPPL teams: (Yes, I know this is the Rogue newsletter – but the League has asked me to get the word out as far and as wide as possible.) The committee for next year’s MAC and miniMAC series is being formed. If there are players from any GPPL team that want to participate on the committee, the GPPL needs to know. Now before you jump at this chance for fame and glory (which there is NONE of!), remember that being on this committee requires a willingness to share ideas, a willingness to travel to wherever the committee meetings are each month, and a willingness to commit to following-through. If this fits you, send an email to [email protected] and ask to be on the MAC committee. They need three team reps.
That’s all for now. Thanks for reading. Remember to never look down the barrel of your marker unless it has been removed from the marker.
Play hard – play safe.