LLC Tax Change

Business owners throughout the state are worried they will be hurt by a new tax on interest and dividends from limited liability corporations. Although the details have not been finalized, the tax goes into effect for the 2009 tax year. “Of 40,000 LLCs in New Hampshire, the vast majority are already paying their fair share and won’t be affected by the rules coming out of (the Department of) Revenue Administration.” [Lynch said at a meeting].

The new law will extend to LLCs the interest and dividends tax, which currently applies to corporations. Until now, an LLC would pay the business profits tax on any profits the company made. But the money an LLC owner paid to himself was not taxed. Under the new rules, the owner’s compensation will still not be taxed. But owners will only be able to take “reasonable compensation,” and any amount above will be taxed at 5 percent as a dividend.

Most LLCs don’t make distributions. Instead of distributions, those in LLCs usually take any excess income as salary because they want to avoid paying the state BPT. They might still have to pay the state BET on it, as well as federal Social Security taxes, but that still comes out to a lot smaller bill than they would receive through the 8.5 percent BPT.

This doesn’t affect your average working small business LLC.

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