Why Switching to an S-Corp in NH Isn’t Always the Best Move
The Appeal and Pitfalls of S-Corps
S Corporations (S Corps) are a favorite among small business owners across the U.S. due to their ability to provide significant federal tax savings. By passing income, losses, deductions, and credits directly to shareholders, S Corps allow business owners to avoid the double taxation that plagues traditional C Corporations. However, what’s good for the goose isn’t always good for the gander—especially if that gander happens to be in New Hampshire.
While S Corps are widely popular in many states, New Hampshire’s unique tax structure poses challenges that make this business model less attractive here. Understanding these challenges is crucial for any New Hampshire small business considering the S Corp route.
How Federal Tax Savings Stack Up
The primary appeal of an S Corp is the federal tax benefit. Instead of paying corporate income taxes, the business’s income flows directly to the owners, who report it on their personal tax returns. This structure avoids the dreaded “double taxation” that occurs with C Corps, where both the company and its shareholders are taxed on the same income.
However, there’s more to the story—especially when it comes to Social Security and Medicare taxes. One of the key benefits of an S Corp is that it separates your income into two categories: W2 wages and ordinary income distributions. Only W2 wages are subject to Social Security and Medicare taxes, potentially reducing the overall payroll tax burden for business owners.
For example, if you’re paying yourself $80,000 in wages and taking $40,000 in profit distributions, only half the income is subject to these payroll taxes. The $40,000 in profit distributions, while still taxed at ordinary income rates, avoids the additional 15.3% payroll tax. That sounds great in theory, but when you factor in New Hampshire’s tax structure, things become more complicated.
The New Hampshire Tax Landscape: BPT and BET
New Hampshire is unique in that it doesn’t levy a broad-based income tax or a general sales tax. Sounds great, right? But wait—there’s a catch. The state has its own business taxes, namely the Business Profits Tax (BPT) and the Business Enterprise Tax (BET). These taxes can significantly diminish the federal tax savings that make S Corps so appealing elsewhere.
• Business Profits Tax (BPT) taxes business profits at a rate of 7.5%, which affects the bottom line for any business.
• Business Enterprise Tax (BET), taxed at a rate of 0.55%, is not a tax on profits but rather on certain expenses, like total wages paid, interest, and dividends. Even if your business isn’t turning a large profit, BET could still impose a financial burden due to your payroll and other expenses.
Additionally, New Hampshire has a personal state tax on certain distributions of profits, such as interest and dividends. Although this tax is scheduled to phase out by 2027, it’s still something to consider for now. The combined weight of BPT, BET, and personal taxes can often outweigh the federal tax savings that initially made the S Corp structure attractive.
Why S Corps Are Less Popular in New Hampshire
Given the impact of BPT and BET, it’s no wonder S Corps are less popular in New Hampshire. In states without such business taxes, the S Corp structure allows for more significant tax savings. But here, the state’s unique tax environment often leads small business owners to explore other structures like C Corporations, which might better align with their financial goals.
In New Hampshire, the combination of state and federal taxes could result in a higher overall tax burden for an S Corp than for a similar business structured as a C Corp. It’s like trying to fill a bucket with holes—no matter how much water (or tax savings) you pour in, the bucket never quite gets full.
What Should New Hampshire Small Businesses Consider?
If you’re a small business owner in New Hampshire, the tax implications of forming an S Corp should be weighed carefully. The BPT and BET are factors that could tilt the scales in favor of other business structures, especially if maximizing tax savings is a priority.
It’s crucial to look at the bigger picture. Sure, an S Corp might save you money on federal taxes, but how does that stack up against the state tax obligations? Could a C Corp, which might allow for more strategic tax planning, be a better fit for your business needs?
What’s Next for New Hampshire S Corps?
There’s always talk about potential changes to the tax landscape in New Hampshire. While nothing is set in stone, any shift in BPT or BET rates—or even a revamp of the state’s approach to taxing businesses—could change the calculus for S Corps. Keeping an eye on legislative efforts and tax policy discussions is wise for any business owner considering an S Corp.
If the state were to reduce or eliminate the BPT or BET, S Corps might see a resurgence in popularity. Until then, it’s all about balancing the pros and cons and ensuring that you’re making the best decision for your business’s bottom line.
Making the Right Choice for Your New Hampshire Business
Choosing the right business structure is one of the most critical decisions you’ll make as a business owner. In New Hampshire, the unique tax challenges faced by S Corps make this decision even more complex. Whether you’re leaning towards forming an S Corp or considering alternatives like a C Corp, it’s essential to consult with a tax professional who understands the intricacies of New Hampshire’s tax laws.
If you’re unsure about the best path forward, don’t go it alone. At AccountAbility, we’re here to help you navigate the complexities of business structures and tax planning in New Hampshire. Reach out to us for personalized advice and support. Let’s ensure that your business is set up for success, no matter what challenges the tax code throws your way.
Check out our blog on NH S Corps for more insights!
Need more guidance? Contact us at AccountAbility for tailored support with your finances and tax preparation. Let’s make sure you’re making the best choices for your business!
