Starting January 1, 2025, New Hampshire taxpayers are no longer subject to the New Hampshire Interest & Dividends Tax (“I&D”). The I&D tax was enacted in 1923 and assessed tax on interest and dividend income. Prior to its repeal, the tax rate was 5% for taxable periods ending before December 31, 2023, 4% for taxable periods ending on or after December 31, 2023, and 3% for taxable periods ending on or after December 31, 2024. The repeal of the I&D tax will result in significant tax savings for many New Hampshire business owners and may change the advice that lawyers and accountants provide to their clients regarding entity formation and transaction structures.
With the repeal of the I&D tax New Hampshire taxpayers will not pay a New Hampshire tax on income that they receive from interest payments, dividend payments, or distributions from closely held entities that were not otherwise exempt from the I&D tax. For many years distributions made to the owners of New Hampshire limited liability companies that had membership interests that were not freely transferrable 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 difference in tax treatment many business advisors recommended that their clients doing business in New Hampshire form a limited liability company with non-transferrable membership interests. For limited liability companies that had multiple owners, for membership interests to be non-transferrable, the other owners of the business were required to approve any transfers. This requirement was more difficult to meet if the limited liability company had one owner, and advisors used various strategies to make the membership interests of single owner limited liability companies not transferrable.
Due to the repeal of the I&D tax, S-Corporation profits distributions will no longer be subject to the tax, removing one of the significant reasons why many business owners opted to form a limited liability company taxed as an S-Corp. rather than an S-Corp. in New Hampshire. Now that the I&D tax is not a factor, business advisors will need to consider other factors when advising New Hampshire clients on the appropriate form of entity. For example, one of the benefits of an S-corp. is that the owner’s compensation is paid via a W-2, with which people are generally more familiar than the guaranteed payment structure applicable to limited liability companies taxed as partnerships. However, S-corps have certain limitations and formalities that do not apply to limited liability companies, such as a limit on the number of shareholders and restrictions on who can be a shareholder of an S-Corp., along with other considerations that may continue to cause business owners to choose a limited liability company over an S-corp. in New Hampshire.
The repeal of the I&D tax may make business transaction structuring easier. Prior to the repeal of the I&D tax, in many cases business owners that sold the assets of their business (which is a common transaction structure for privately held companies) would need to immediately dissolve their business entity and make a liquidating distribution to its owners in order avoid the I&D tax (in New Hampshire liquidating distributions were not subject to I&D tax). However, frequently reasons exist where liquidation is not the preferred course of action. In those cases, the business owner would need to evaluate its options to determine the best course of action or implement a work around. The repeal of the I&D tax enables business owners to structure business transactions as they believe most optimal without concern over New Hampshire tax implications when distributing sale proceeds.