This question was answered by John M. Cunningham of the McLane Law Firm
Q: I’ve heard that if you’re a member of a New Hampshire LLC, you don’t have to pay the 5% New Hampshire Interest and Dividends Tax on LLC distributions of profits to you; but you do have to pay this tax on corporate dividends. With the recent repeal of the “LLC tax,” do these rules still apply?
A: In general, yes, but there is an unfortunate new wrinkle.
If you’re a New Hampshire member of an LLC and you get distributions of profits from your LLC, you generally won’t owe the I&D Tax on these distributions as long as your LLC has “non-transferable shares.” Your LLC has non-transferable shares if, in general, its LLC agreement says you need the consent of at least one other member in order to transfer your membership to another person.
However, in February 2010, the New Hampshire Department of Revenue Administration (the DRA) amended one of its regulations—officially called “Rev 901.05”—to state, in essence, that if an LLC is subject to federal income taxation as a C or S corporation, distributions by it to its New Hampshire members will be subject to the I&D Tax even if the LLC has non-transferable shares.
In my view, there’s a significant question whether this regulation was valid when issued; and it’s possible that even if it was, it’s presently ineffective and won’t become effective unless the DRA reissues it as part of the new regulations it will issue in a few months in response to the “LLC tax” repeal.
After all, it was clear before the enactment of the “LLC tax” that New Hampshire members of LLCs that had non-transferable shares didn’t owe the I&D Tax even if their LLCs were C or S corporations. So how can the DRA administratively impose the I&D Tax on New Hampshire members of these LLCs after the repeal of the “LLC tax”? To do so would be to impose a brand new tax. I can’t believe that’s what the New Hampshire legislature wants.
But for now, if the LLC of which you’re a member is taxable as a C or S corporation or if you elect this taxation, Rev 901.05 poses a serious question for you and other members: Should you ignore the I&D Tax and run the risk of a DRA audit and the imposition on you of the tax plus interest and penalties; or should you pay the tax even though, in the end, you may not owe it? You need to consult your tax adviser on this question.
John Cunningham is of counsel to the McLane law Firm.Know the Law is a bi-weekly column sponsored by The McLane Law Firm.
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