Amendment to SB
125-FN-A Proposed by the Majority of the Committee on Ways and Means - R Amend the title of the bill by replacing it with the following: AN ACT relative to the standards and burden of proof with respect to the business profits tax deduction for reasonable compensation attributable to owners of partnerships, limited liability companies, and sole proprietorships. Amend the bill by replacing all after section 1 with the following: 2 Clarification of Reasonable Compensation Deduction. RSA 77-A:4, III is repealed and reenacted as follows: III.(a) In the case of a proprietorship, partnership, or limited liability company filing a business profits tax return as a proprietorship or partnership, a deduction equal to a fair and reasonable compensation for the actual personal services of a natural person who is a proprietor, partner, or member provided to the business organization; provided, however, that the amount of such deduction shall not reduce such business organization’s taxable business profits to less than zero. The purpose of this paragraph is to permit a deduction from gross business profits of such a proprietorship, partnership, or limited liability company of all amounts that are fairly attributable to the actual personal services of the proprietor, partner, or member. Such amounts shall not exceed the amount reported as earned income on the federal income tax returns of the proprietor, partner, or member, but may also include an amount not to exceed net rental income as compensation for operating rental property, and an amount not to exceed 15 percent of the gross selling price as commissions on the sale of business assets. (b) Subject to the provisions of subparagraph (c) which establishes a record-keeping safe harbor, the method of determining the amount of the deduction available to the business organization allowed under this paragraph shall be by using the standards set forth in section 162(a)(1) of the United States Internal Revenue Code, as it may be amended from time to time, and the Treasury Regulations, administrative rulings, and judicial cases issued thereunder. The business organization shall keep such records as may be necessary to determine that the deduction is reasonable under these standards. (c) In lieu of substantiating the value of the personal services of proprietors, partners, or members, a business organization or group of related business organizations may elect, as a record-keeping safe harbor, to deduct up to $50,000 as total compensation for the tax year; (d)(1) In this paragraph, “record-keeping safe harbor” means that amount of compensation for personal services claimed by a business organization which does not need to be substantiated by any evidence, records, or legal or regulatory authority, except as provided in subparagraph (e). (2) Notwithstanding subparagraph III(d)(1), the record-keeping safe harbor shall not be relevant or admissible for any purpose in determining whether a compensation deduction claimed in an amount in excess of any such record-keeping safe harbor is fair and reasonable. (e) A business organization or group of related business organizations may elect the record-keeping safe harbor option in subparagraph III(c) without a redetermination of the reasonableness of the deduction by the commissioner. Any such deduction claimed by the business organization or group of related business organizations shall not be subject to challenge; provided, that upon request, the business organization or group of related business organizations shall be required to substantiate that the proprietor or at least one partner or member performed actual personal services for the business organization or group of related business organizations. (f) Related business organizations electing not to substantiate the extent of the actual personal services of their proprietors, partners, and members, shall be limited to the record-keeping safe harbor deduction, less any owners’ compensation taken on the federal tax returns of corporate members of the group, allocated among the related business organizations. For the purposes of RSA 77-A:4, III, “related business organizations” are unitary business organizations and business organizations that would qualify as unitary but for the fact that they conduct business only within the state. (g) A business organization claiming a deduction under this paragraph shall bear the burden of proving that all proprietors, partners, or members for whom a deduction is being claimed provided actual personal services to the business organization at any time during the taxable period. Once a business organization has satisfied this burden of proof, the amount claimed as a deduction shall be presumed to be reasonable, unless the commissioner proves by a preponderance of the evidence that the deduction claimed by the business organization is clearly unreasonable. 3 New Paragraph; Appeal for Redetermination or Reconsideration; Procedure. Amend RSA 21-J:28-b by inserting after paragraph VII the following new paragraph: VIII. The department shall bear the burden of proof on any change to any compensation deduction under RSA 77-A determined by examination. 4 New Section; Interest and Dividends Tax; Excess Compensation. Amend RSA 77 by inserting after section 4-f the following new section: 77:4-g Dividend. Excess compensation determined by audit of the department shall not be considered a dividend under this chapter unless such determination is accepted by the Internal Revenue Service. 5 Taxpayer Records. Amend RSA 77-A:11, I to read as follows: I. Keep such records as may be necessary to determine the amount of its liability under this chapter and to determine whether the compensation claimed as a deduction under RSA 77-A:4, III is reasonable; 6 Applicability. This act shall apply with respect to taxable periods beginning on or after January 1, 2011. 7 Effective Date. This act shall take effect upon its passage. 2011-1883h
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