United States

New Hampshire enacts business tax bills

Repeals state’s ‘phantom tax’ and conforms to Internal Revenue Code

TAX ALERT  | 

On June 22, 2016, New Hampshire Gov. Maggie Hassan signed Senate Bills 342 and 239, providing for a repeal of the ‘phantom tax,’ conformity to the Internal Revenue Code (Code) and an increase in the depreciation deduction for capital expenditures.

Senate Bill 342 repeals the state’s phantom tax, which imposes a mandatory step-up levy under the business profits tax in the amount equal to the net increase in the federal basis of all underlying assets transferred or sold through the sale or exchange of an ownership interest, effective on and after Jan. 1, 2016. For example, the phantom tax would apply when an interest in a partnership is sold and the partnership elects to step up its basis under section 754.

Under the new law, such a net increase is not subject to the business profits tax. Instead, the bill provides that a business organization include into its gross business profits, for each taxable period, an amount equal to the annual depreciation or amortization attributable to the increase in the basis. However, a business organization may choose to make an irrevocable election to immediately recognize the basis increase for a particular sale or exchange. If such an election is made, similar to the previous law, the business organization must make an addition to gross business profits in an amount equal to the net increase in the basis of its assets in the tax period when the sale or exchange of the ownership interest occurs. Those businesses who choose to make that election may deduct against gross business profits any annual depreciation or amortization attributable to the increased benefit.

A business organization making the election would calculate the gain or loss on the subsequent sale or other disposition of an asset with regard to the basis increase from the sale or exchange of the ownership interest in the business organization. While those businesses who do not make such an election would calculate the gain or loss on the sale or other disposition of an asset without regard to the basis increase from the sale or exchange of the ownership interest in the business organization.

The elimination of the mandatory step-up levy will allow businesses the option to phase in the increase in value over time, thereby changing how closely held companies are taxed upon a sale or exchange in an ownership interest.

Senate Bill 239 updates New Hampshire’s Code conformity date for purposes of computing the state’s business profits tax liability, with certain adjustments, to Dec. 31, 2015 (currently, Dec. 31, 2000). The change would apply to tax periods beginning on or after Jan. 1, 2017.

Senate Bill 239 also provides for an increase in the section 179 depreciation deduction for capital expenditures, for property placed in service on or after Jan. 1, 2017, in order to conform with federal tax changes enacted last year. The bill raises the annual deduction limit from the current $25,000 (for property placed into service on or after 2011) to $100,000. However, even with the increase, the new limit is still short of the $500,000 deduction permitted under the federal code and other New England states. Additionally, the legislation provides non-conformity with several Code provisions: section 168(k) (bonus depreciation); section 199 (domestic production activities); and section 181 (election to deduct production costs).

Senate Bills 342 and 239 are expected to simplify the tax filing process through the conformity with the Code, reduce taxes for capital investors, and provide greater flexibility for businesses selling or exchanging ownership interests. New Hampshire taxpayers should review the legislation and contact their tax advisors with questions.

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