Date: December 18, 2009

Primary Author: Scott Beane

 

Question:

What is NH's business income tax on small businesses?
 

Answer:

Though New Hampshire has no income tax on W-2 wages, amongst its other taxes include significant business income taxes. As of July 1, 2009, the State's marginal tax rate, which is not progressive based, is 13.5%. That is comprised of its Business Profits Tax  -  of 8.5% plus its 5% Interest and Dividends Tax.  -  Unlike most states, N.H. recognized single owner Limited Liability Companies (LLCs) as separate from their owners. As a result, a single owner LLC is not disregard as it is for Federal income tax purposes. Rather, distribution of NH retained earnings is considered a dividend to is owner who is then taxed at 5%. Interesting enough, sole proprietorships in the exact same economic position, do not pay the 5% Interest and Dividends Tax. Thus, NH taxes all entities as corporations for purposes of its Business and Interest and Dividends income taxes.

As a caveat, since N.H. does not tax W-2 wages, it allows a "reasonable compensation deduction" against non-corporate business profits. However, due to State deficit spending, the NH Department of Revenue only allows most small businesses a $6,000 amount per owner and requires the small business owner to weigh the cost of appeal with just paying their tax. At the time of this writing, the NH DOR was prosecuting 330 cases under appeal. Problem is, due to State employee reductions the NH DOR audit department employees (those that assess tax) are assisting the Appeal department!

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