Q: As a small business owner, will income from my business be subject to New Hampshire tax?
A: Although New Hampshire natives pride themselves on paying no
income tax, New Hampshire does have a 5% tax on interest and
dividend income (the "I&D tax"), which, despite its
name, reaches income from businesses that we do not usually think
of as generating dividends. The I&D tax does apply to the
usual suspects: interest from bonds, promissory notes and debts
owed to the taxpayer, and dividends paid on corporate stock, among
others. However, I&D tax also applies to certain distributions
from S corporations, partnerships and LLCs.
Taxable distributions include those from partnerships and LLCs with
transferable shares, as well as distributions from partnerships and
LLCs with nontransferable shares that do not have a usual place of
business in New Hampshire (to the extent the income would have been
taxable if received by a New Hampshire resident from the original
source). In contrast, partnership and LLC distributions are not
subject to the tax if the entity has nontransferable shares and a
usual place of business in the state. Shares or interests are
"transferable" if they can be transferred without prior
consent from the other members and without causing the dissolution
of the entity. Another member's right of first refusal does not
make interests nontransferable.
A distribution from an S corporation is subject to I&D tax
(unless the S corporation has no current or accumulated profits).
But, if an LLC whose distributions are nontaxable elects S
corporation status for federal income tax purposes, its
distributions remain exempt from the I&D tax. Many New
Hampshire S corporation owners have reduced their I&D tax
liability by converting their corporations to LLCs.
Generally, the I&D tax is paid by individuals who live in New
Hampshire for any part of the taxable year, estates of New
Hampshire decedents, and any partnership or LLC with
nontransferable shares and a usual place of business in New
Hampshire. The tax on these partnerships and LLCs is limited to the
interest and dividends received by the entity that would be taxable
if received instead directly by a resident individual. The
tax applies when interest and dividends from all sources exceeds
$2,400 ($4,800 for joint filers).
Notably, nongrantor irrevocable trusts are not subject to the
I&D tax regardless of what income they receive. This may open
up planning opportunities for individuals to use nongrantor
irrevocable trusts to hold shares of S corporations or other
entities whose distributions are taxable.
Published in the Manchester Union Leader, June 2015.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.