By Joyce M. Hillis
By Joyce M. Hillis
On July 1, 2009, Governor John Lynch signed HB2 (2009 Laws Ch. 144), which contained the State of New Hampshire’s $11.5 billion budget for the next two years. The budget law includes certain revenue raising changes to New Hampshire tax laws, including an important change to the New Hampshire interest and dividends tax law (RSA 77). The I&D tax changes make distributions from limited liability companies (“LLCs”) and partnerships subject to the 5% I&D tax to the same extent as dividend distributions from corporations are currently subject to the tax.
Prior to the enactment of HB2, distributions to owners of a partnership or an LLC were not considered dividends for I&D tax purposes and, therefore, were not taxable to the owners under the I&D tax, so long as the partnership or LLC ownership interests were “non-transferable” (meaning not transferable without the consent of at least one other owner or causing dissolution of the entity). The new legislation now treats distributions from all LLCs and partnerships, exclusive of distributions that are compensation for services, as subject to the I&D tax to the recipient owners in the same manner as dividends are to corporate shareholders.
This legislative action creates a significant potential for additional tax liability, particularly for owners who are not actively engaged in the business of the LLC or partnership. Now, if a partnership or LLC makes a distribution to its owners out of accumulated profits that is not compensation for services, the distribution will be taxable to the owners who are New Hampshire residents as a dividend at a rate of 5%. Owners are to determine if a distribution is from accumulated profits in the same manner in which a C corporation determines whether it is making distributions to shareholders from its earnings and profits under the Internal Revenue Code.
This change to RSA 77 is effective for tax years beginning on or after January 1, 2009, meaning that it applies for all of 2009 for calendar-year taxpayers. The New Hampshire Department of Revenue has issued a Technical Information Release (TIR 2009-008) explaining this I&D tax change. Businesses operating in the form of LLCs and partnerships should contact their tax advisors prior to making any further distributions that may be affected by the new law.
During HB2 budget negotiations, the legislature considered a number of other potential new taxes, including an estate tax, a capital gains tax, and an extension of the real estate transfer tax to loan refinancings. The legislature did not include any of these additional taxes in the budget; however, there were a few other notable changes. The meals and rentals tax increased from 8% to 9% effective July 1, 2009, and the new law expanded the definition of “hotel” and “rentals” to include the rental of campsites. The new law also increased the New Hampshire tobacco tax effective July 1, 2009, and expanded its coverage to include snuff and cigars.