Know the Law: The New Hampshire Interest and Dividends Tax

Published in the Union Leader
By: Catherine H. Hines

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.

Catherine Hines can be reached at

Know the Law is a bi-weekly column sponsored by The McLane Law Firm.
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