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New Tax Law Changes in New Budget
David M. Law & Joyce McKenna 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-"I and D Tax"). The I and D Tax changes make distributions from Limited Liability Companies ("LLCs") and partnerships subject to the 5% I and 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 and D Tax purposes and therefore were not taxable to the owners under the I and 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 and 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) (copy attached) explaining this I and 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.

New Hampshire Department of Revenue Administration

109 Pleasant Street, Concord, NH 03301

TECHNICAL INFORMATION RELEASE

TIR 2009-008 Date July 16, 2009

Distributions from Limited Liability Companies, Partnerships and Associations Subject to Interest and Dividends Tax

A Technical Information Release is designed to provide immediate information regarding tax laws administered by the Department or the policy positions of the Department as a service to taxpayers and practitioners. A Technical Information Release represents the position of the Department on the limited issues discussed herein based on current law and Department interpretation. For the current status of any tax law, practitioners and taxpayers should consult the source documents (i.e., Revised Statutes Annotated, Rules, Case Law, Session Laws, etc.). Questions should be directed to Central Taxpayer Services at (603)271-2191.

The Legislature passed and Governor Lynch signed HB2, which has enacted changes to the Interest and Dividends Tax law, RSA 77, that make all distributions from Limited Liability Companies (“LLCs”), Partnerships and Associations subject to the Interest and Dividends Tax to the same extent that distributions from Corporations are subject to the tax. The following summarizes some important features of the changes in the law and the Department’s plans to implement those changes:

Distributions from LLCs, partnerships and associations will only be subject to the Interest and Dividends Tax to the same extent that distributions to corporate shareholders are taxable as dividends.
A distribution that is a return of capital is not subject to taxation.
In order to determine whether a distribution is a return of capital, the entity must first determine its accumulated profits.
Accumulated profits is determined for LLCs, partnerships, associations and S corporations in a manner that is equivalent to a calculation made by a C Corporation of its earnings and profits under the Internal Revenue Code of 1986, as amended.
The compensation deduction as provided in RSA 77-A:4, III shall be considered a reduction in revenue of an LLC or partnership in the same way that compensation paid by a corporation is a reduction in “earnings and profits”. As a consequence, the value of personal services of a partner or member of an LLC to the partnership or LLC is not subject to taxation.
Liquidating distributions are not subject to taxation.
LLCs, partnerships and associations that have non-transferable shares and were, under prior law, required to file and pay the Interest and Dividends Tax will no longer be required to file returns or pay the tax. Rather, the members, partners, and owners will pay the Interest and Dividends tax on the distributions from these entities.
Pursuant to Section 279 of HB2 (Chapter 144, Laws of 2009), the changes to RSA 77 are effective for calendar year/tax years beginning on or after January 1, 2009. All distributions are made during the year are subject to the tax based on the calculation of earnings and profits for the entire tax year.
Rulemaking to provide further clarification of the application of the changes to the law will be initiated by the Department of Revenue Administration shortly. If you would like to receive notice of the rulemaking in order to participate in the public hearings or provide written comment, you may provide your contact information by e-mail: gbartlett@rev.state.nh.us or call 603-271-0606.

Individuals who need auxiliary aids for effective communication in programs and services of the Department of Revenue Administration are invited to make their needs and preferences known to the N.H. Department of Revenue Administration, 109 Pleasant Street, Concord, NH or by contacting them at (603)271-2191.

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