For Granite State businesses, the tax season is bringing mixed results: Lower state tax rates will offer relief to some, while a federal corporate flat tax could have others singing the blues.
The biggest change is the new flat federal corporate rate of 21 percent in the Tax Cuts and Jobs Act (TCJA), says Lori Liberty, CPA, personal financial specialist and principal at Melanson Heath in Manchester. It replaces the graduated tax brackets that ranged from 15 percent to 39 percent in prior years. Those who were paying the higher tax rate will see a significant cut in their tax bill, but those who were at the lower end—smaller companies—will take a bigger tax hit.
“For example, a corporation with taxable income of $50,000 previously paid federal income taxes at the 15 percent tax rate bracket for a total of $7,500. Now, that corporation will pay a 21 percent tax rate on $50,000 of taxable income resulting in a total tax of $10,500 or a $3,000 tax increase,” Liberty says.
There is a new provision of the tax code included in the TCJA, referred to as the pass-through deduction, or Section 199A qualified business income (QBI) deduction, that could help companies not covered by the flat tax. S corporations, LLCs, partnerships and sole-proprietorships “passthrough” income to owners will be taxed on their individual income tax returns, Liberty says.
“The purpose of the deduction is to provide some parity between the new flat 21 percent corporate rate and the tax rates paid by owners of pass-through entities on their individual income tax returns,” she says. But this deduction is not a straight 20 percent of QBI as some may expect.
Tyler Waldrupe, CPA and senior manager in BerryDunn’s Tax Consulting and Compliance Group, agrees.
“To put the complexity of the new [QBI] into perspective, the IRS published 184 pages of proposed regulations in August attempting to clarify how this deduction is computed, yet still didn’t answer all the questions tax practitioners have regarding eligibility and mechanics of the deduction,” Waldrupe says.
“Simply put, section 199A allows a deduction for up to 20 percent of the qualified business income earned from partnerships, limited liability companies, S corporations, trusts/estates, and sole proprietorships.”
But the deduction is computed at the individual owner level and is subject to complex phase-out rules.
And, if a businessperson is an owner of multiple pass-through entities, there are further aggregation rules to follow.
The NH Difference
Things can get really complicated when business owners tackle their state taxes. New Hampshire is a fixed-conformity state, which means the state does not immediately adopt new IRS Tax Codes as they are enacted, says NH Department of Revenue Administration (DRA) Commissioner Lindsey Stepp. This allows the state time to evaluate federal changes before accepting them.
The state is currently operating under the 2016 version, which means taxpayers filing business tax returns in NH have to adjust when converting their federal taxable income, such as interest limitations, deductions for meals and entertainment, and depreciation expensing provisions, Waldrupe says.
DRA Assistant Commissioner Carollynn Lear says the state forms prompt the taxpayer to make an adjustment when such codes are different, but she adds that using a tax practitioner is often better than trying to quantify it oneself. “Every March, the DRA makes a presentation to the legislature about potential impacts of any tax code changes,” Stepp says. The DRA flags important differences between the current federal tax code and the version adopted by the state.
While not all of the changes brought about by the TCJA will have an immediate effect in NH, at least one aspect of the Act that will affect state taxes is “deemed repatriation,” a mandatory tax on past earnings held abroad between 1986 and 2017. “New Hampshire doesn’t tax deemed repatriation but does tax the dividends from it. We are seeing increases in revenue as a result of the TCJA, even though we are not tied to that version of the tax code,” Stepp says.
Although NH has not yet adopted the new provisions of the TCJA, the state has made some taxpayer-friendly changes, Waldrupe says. The business profits tax rate has decreased from 8.2 percent to 7.9 percent, and the business enterprise tax rate has decreased from 0.72 percent to 0.675 percent (effective for tax periods ending on or after Dec. 31, 2018). Another change increases the amount taxpayers may be allowed to expense for property placed in service after Jan. 1, 2018 from $100,000 to $500,000.
Liberty says businesses should review the new generally accepted accounting standards (GAAP) changes relating to revenue recognition. Businesses that prepare GAAP-based financial statements will be affected, and an accounting method change may need to be considered.
“In light of all the changes brought forth by the TCJA, taxpayers should be asking themselves if there is a business purpose to consider restructuring,” Waldrupe says. “In tandem, taxpayers should work with their tax advisors to consider associated tax implications.”