The Senate this week joined the House passing tax increases on New Hampshire businesses. Some reports give the impression that the House and Senate budgets would not raise taxes, but would repeal future tax cuts. Here we explain why that is not correct and the budgets raise business taxes, including the rates that businesses will pay this year.
Under current law, the business profits tax rate is 7.7 percent and the business enterprise tax rate is 0.6 percent for “taxable periods” that end “on or after December 31, 2019.”
Both the House and Senate budgets would repeal those rates and replace them with rates of 7.9 percent and 0.675 percent, respectively.
The budgets also would repeal the existing state law that lowers those rates further, to 7.5 percent and 0.5 percent, for taxable periods that end on or after Dec. 31, 2021.
Understanding how businesses pay taxes
What does it mean when state law declares that a tax rate applies to a “taxable period ending on or after December 31, 2019?”
It does not mean that the tax rate takes effect on January 1, 2020.
A “taxable period” is not a calendar year. State law (RSA 77-A:1, IV) defines “taxable period” as a business’ fiscal year for federal income tax purposes.
So a taxable period “ending on or after December 31, 2019” is a business’ fiscal year that starts in 2019 and ends on or after Dec. 31, 2019.
A business will start to pay those tax rates in 2020, then, right?
Businesses’ fiscal years do not always correspond with the calendar year. They can end on the last day of any quarter.
Plus, businesses are required to pay taxes quarterly, not annually.
Under New Hampshire law, any business with an estimated tax liability of more than $200 is required to estimate what its next year’s tax bill will be, and then submit 25 percent of that payment each quarter.
Here is how that works.
In 2019, employers begin paying quarterly taxes for fiscal years that end “on or after December 31, 2019.”
For example, a business with a fiscal year that ends April 30, 2019, will start a new fiscal year on May 1, 2019. That new fiscal year will end April. 30, 2020.
So starting on May 1, 2019, that company will be taxed at the rate in effect for “taxable periods ending on or after December 31, 2019.” It will make payments at that rate every four months throughout its tax year.
Under current law, companies with fiscal years starting May 1, July 1, and Oct. 1, 2019, will be making business profits tax payments at the 7.7 percent rate and business enterprise tax payments at the 0.6 percent rate this year.
That’s why the House and Senate budgets do not just affect future tax rates that employers are not yet paying. The budgets would raise those fiscal year 2019 tax rates to 7.9 percent and 0.675 percent.
So the House and Senate budgets would not merely not repeal future tax cuts, as is being reported. They would raise taxes on businesses this year.
A tax increase is a tax increase
Furthermore, it is worth noting that “repealing a future tax cut” also is a tax increase. Those tax cuts are set in existing law. They apply automatically. To replace them with a higher rate is to raise taxes.