Friday, January 22, 2010

Some New Hampshire LLCs May See Higher Tax Bills

Some New Hampshire Small Business May See Higher Tax Bills

As part of the budget negotiations, state lawmakers are considering a proposal to close a tax loophole that Limited Liability Companies have enjoyed.

An LLC is just one way to organize as a small business, but it’s become increasingly popular.
One of the reasons is that an LLC’s income is not taxed the same way as other companies.
But that’s likely to change, as NHPR’s David Darman reports.

Revenue Commissioner Kevin Clougherty told lawmakers working on the state budget that limited liability companies, or LLC’s were getting a bit of free ride on taxes.

Clougherty said small businesses can be organized as LLC’s, or more traditionally as what’s called an S corporation, or S corp.

And there’s a definite difference in what the two groups pay in taxes.

The s corp directors, when they receive a dividend what happens is they are paying the business taxes and the interest and dividend tax. The LLCs are paying the business tax but not an interest and dividends tax, so there’s a decided advantage.

Currently the interest and dividends tax is 5%, and under the proposal any income an LLC owner receives would be considered a dividend.

About 10,000 businesses in the state are registered as LLCs.

Officials say it’s the fastest growing category of business organization in New Hampshire.
For example, Lotions and Potions on Concord’s Main Street is an LLC that has been open several years.

Co-owner Andrew Hatch says he organized the store as an LLC because it was simpler.
It’s certainly less complicated and more importantly less expensive to become an LLC.
Another benefit of the LLC is that it shields the owner’s personal fortune from liability in the event of losses.

Hatch says taxes were the furthest thing from his mind when he organized as an LLC.
It certainly wasn’t a decision I took in order to avoid or work around any tax structures.
Much of New Hampshire’s business community has reacted negatively to the proposal to further tax LLCs.

The Business and Industry Association, or BIA has said the proposal would be a “double tax” on small businesses.

They argue LLC owners already pay the Business and Enterprise tax, or BET, which covers payrolls and other compensation.

Tax adviser Bill Ardinger says the proposal will also make the tax burden on LLC’s much too heavy.

This proposal could result in a total effective tax rate on business earnings from a small business at 13 and half percent. That’s the state alone. We would be the highest tax rate on small businesses in the country.

Opponents of the proposal say that high tax rate would make New Hampshire much less attractive for small businesses to locate here.

But state Revenue Commissioner Kevin Clougherty says the tax burden argument is baseless.
That’s exactly what our corporations are paying now on the other side. So we’re not I’m not trying to deal with..the issue of the rate. I’m trying to say there’s an equity issue here. Everybody should be the same.

Clougherty says he’s pursuing equity for another reason as well.
He says the inequities worry him from a legal angle.

I’m very concerned about our liability if we’re not treating everybody fairly. Because just as much as you may get the argument from the LLC side saying well, you’re not taking into consideration the value I bring to this entity, you’re going to get the same arguments from the people on the other side and they’re getting taxed.

Should the proposal end up in the budget, it could mean an additional 15 to 20 million dollars a year in state revenue.

There wasn’t much discussion of the matter among the budget writers.

So don’t be surprised if this proposal closes the loophole LLCs have enjoyed.

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