Ending The Dreaded Basis Step-Up Addition Statute

Published in NH Bar News (2/15/2017)

For many years, one of the most controversial aspects of the New Hampshire business profits tax has been the basis step-up requirement triggered on the transfer of equity in a business. In the 2016 session, the NH Legislature amended the statute to clarify its meaning and resolve its onerous impact. Businesses can now choose the manner in which to report a basis increase.

Prior to 2016, the business profits tax statute required that, upon the sale or exchange of an interest in a business entity, the business adds to its gross business profits "an amount equal to the net increase in the basis of all underlying assets transferred or sold through the sale or exchange of the interest" (RSA 77-A:4 XIV, 2015).

Federal law applied to determine the increase in asset basis. The Department of Revenue Administration (DRA) regularly interpreted this provision to require additions to gross business profits whenever equity was sold in a business with an Internal Revenue Code Section 754 election, or when an IRC Section 338 election was made, to treat a stock sale as an asset sale.

Moreover, the DRA generally imposed the addition on the seller. Thus, the seller paid the additional tax while the buyer had the benefit of additional depreciation. This had a significant impact on business transactions. Frequently, sellers would demand an increase in purchase price to compensate them for their additional tax costs. Because this requirement is unique to New Hampshire, it was easy to overlook and difficult to explain to professionals not practicing regularly in New Hampshire.

The problems caused by the statute became public in late May 2015 when the Planet Fitness CEO testified before the Senate Finance Committee that Planet Fitness might leave New Hampshire if the Legislature did not revise the statute. Due to various factors, including the lack of time to address the issue in proper detail, the 2015 legislative session ended without a change in the statute.

The Legislature again addressed the issue in the 2016 session and, by the end of the session, replaced the old step-up requirement in its entirety. The new statute removes some ambiguity from the old statutory language and provides two options for business profits tax treatment of an equity sale triggering a federal basis increase. It is applicable for all sales or exchanges of business interests occurring on or after Jan. 1, 2016.

The new statute applies upon the sale...