New Hampshire Business Tax Law Changes
(An Explanation of House Bill 517)
Recent legislation (HB 517) has produced three significant changes in New Hampshire’s business taxation.
New Section 179 expense limit
First, the Section 179 deduction limit will be increased from $100,000 per year to $500,000, matching last year’s federal limit. This change applies to assets placed in service beginning January 1, 2018. Note that the federal amount is indexed for inflation (and has already climbed to $510,000 for 2017), while the NH amount is not indexed, and will remain at $500,000.
References to United States Internal Revenue Code
Second, the legislation updates the “as of” date that applies when referencing the US Internal Revenue Code (“IRC”). Like most other states, New Hampshire’s Business Profits Tax “piggybacks” off the federal tax system. Instead of completely rewriting tax laws from scratch, NH law (the Revised Statutes Annotated, or “RSA”) uses the US IRC as a starting point, to which it makes NH-specific modifications, including “decoupling,” where it departs from the IRC for some items and uses its own rules. (The Section 179 limit described above is an example of decoupling.) However, the IRC is changed frequently, and the version that existed in one year is not necessarily the same as existed in the next. To avoid unintended or downright squirrelly results, the NH RSA must change as well, and it does not occur automatically. HB 517 updates this link by referencing the most recent iteration of the US IRC.
The most recent applicability dates, including the update in the new legislation, are shown in the chart below.
NH Revised Statutes Annotated references to U.S. Internal Revenue Code
|For the tax years shown below:||NH RSA’s mention of U.S. IRC refers to the IRC in effect on:|
|Tax years beginning after 1/1/2000||12/31/2000|
|Tax years beginning on or after 1/1/2017||12/31/2015|
|Tax years beginning on or after 1/1/2018||12/31/2016|
Expanded tax rate reduction
Finally, as shown in the chart below, HB 517 lowers, in stages, the rates of NH’s Business Profits Tax (“BPT”) and Business Enterprise Tax (“BET”). Previous legislation had already lowered the rates, also in stages, and the current change takes it further. Note that one of the previous reductions is contingent upon the state meeting certain revenue targets, and while the rollout of the new rates suggests that lawmakers are confident that those targets have been met, that is not yet fully quantified, and final measurement is due by the end of this year. For that reason, the stage that provides BPT and BET rates of 7.9% and 0.675%, respectively, remains tentative, potentially instead remaining at the rates applicable to the preceding stage. The decreases following that one, though, are set in stone, but with an additional twist explained below.
No tax law change worth its salt is accomplished without something confusing buried in the details, and this one is no exception. It contains what we will refer to as a “Back to the Future” clause. Specifically, the new legislation subtly distinguishes between effective dates and applicable dates for the last two rate changes. For each of those two changes, this causes the law to “kick in” (become effective) partway through the year to which the rate change applies, but while causing the change to become applicable retroactively, as of the beginning of that year. (This is a good example of what tax practitioners refer to as a “goofy result.”) Most taxpayers pay tax throughout a given year by means of the “prior year tax safe harbor method,” simply making four equal payments totaling their prior year tax. They then settle up any difference when their return or extension is filed. For them, this distinction between effective and applicable dates is irrelevant. Those who do not or cannot rely on the prior year safe harbor (newly-formed taxpayers, for instance), may be forced to frontload their payments somewhat due to this feature, only to reduce payments to recoup that excess in later quarters when the rate drops become effective.
The rate changes are shown in the chart below.
Scheduled NH Tax Rate Changes
|Before HB 517||Current Law (After HB 517)|
|Years ending prior to 12/31/16||8.5%||0.750%||8.5%||0.750%|
|Years ending on or after 12/31/16||8.2%||0.720%||8.2%||0.720%|
|Years ending on or after 12/31/18a||7.9%||0.675%||7.9%||0.675%|
|Years ending on or after 12/31/19b||7.9%||0.675%||7.7%||0.600%|
|Years ending on or after 12/31/21c||7.9%||0.675%||7.5%||0.500%|
(a) These rates, for the 12/31/18 period only, are contingent upon the state meeting certain revenue targets by June 30, 2017. If unmet, the 8.2% and 0.720% rates will apply for this period, even with the passage of HB 517.
(b) The law prescribing these rates becomes effective 7/1/19. Estimated taxes paid prior to this date presumably should be paid at the rates applicable to the prior period.
(c) The law prescribing these rates becomes effective 7/1/21. Estimated taxes paid prior to this date presumably should be paid at the rates applicable to the prior period.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.