Starting January 1, 2025, New Hampshire taxpayers are no longer subject to the interest tax and dividends of New Hampshire (I & D). The I&D tax was approved in 1923 and assessed the tax on interest and dividend income. Prior to its repeal, the tax level was 5% for the taxable periods that ended before 31 December 2023, 4% for the taxable periods ending in or after December 31, 2023, and 3% for the taxable periods ending in or after 31 December 2024.
Repealing the I&D tax will result in significant tax savings for many New Hampshire business owners and may change advice that lawyers and accountants give to their customers regarding the formation of the entity and transaction structures.
With the repeal of the I & D tax, New Hampshire taxpayers will not pay a New Hampshire tax on the income they receive from interest payments, dividend payments or distribution by units held closely that were otherwise excluded from tax I & d.
For many years, distributions made to owners of Limited Liability Companies of New Hampshire who had membership interests that were not freely transferable were not subject to the I&D tax. However, dividends paid by a corporation, regardless of its tax status, were subject to the I&D tax. As a result of this change in tax treatment, many business advisers recommended that their clients do business in New Hampshire to form a limited liability company with non -transferable membership interests.
For limited liability companies owned by numerous owners, for the interests of membership to be non -transferable, other business owners were required to approve any transfer. This requirement was more difficult to meet if the limited liability company had an owner, and councilors used different strategies to make interests of membership of limited liability companies with a single transferable owner.
Due to the repeal of the I&D tax, corporate profits distributions will no longer undergo tax, removing one of the significant reasons why many business owners decided to form a limited liability company taxed as a corpus. instead of forming a corpus. in New Hampshire.
Now that the I&D tax is not a factor, business advisers will have to consider other factors when advising New Hampshire clients on the proper form of the entity.
For example, one of the benefits of a corpory S. is that the owner’s compensation is paid through a W-2, with which people are generally more recognized than the guaranteed payment structure applicable to limited liability companies taxed as partnerships . However, corporations S have certain restrictions and formalities that do not apply to limited liability companies, such as a limit of shareholders and restrictions on who may be a shareholder of a S. Corps, along with other considerations that can continue to cause business owners to select a limited liability company over a Corpus S. in New Hampshire.
Repealing the I&D tax can make it easier to structure the business transaction. Before repealing the I&D tax, in many cases businesses owners who sold their business assets (which is a common transaction structure for private companies) Avoid I & D tax. (In New Hampshire, liquidation distributions were not subject to I & D tax.)
However, there are often reasons when liquidation is not a favorite course of action. In those cases, the business owner will need to evaluate his options to determine the best course of action or apply a job.
Repealing the I&D tax enables business owners to structure business transactions as they believe more optimal without concern for New Hampshire tax implications when distributing sales revenue.
Patrick Closson is a director in the McLane Middleton’s McLane Corporate Department, and can be reached at Patrick.Closson@mclane.com. Beth Fowler is a member of the McLane Middleton tax department, and can be reached in beth.fowler@mclane.com.