HOUSE BILL 48

53rd legislature - STATE OF NEW MEXICO - first session, 2017

INTRODUCED BY

Sarah Maestas Barnes

AN ACT

RELATING TO TAXATION; CREATING A SMALL BUSINESS INCOME TAX DEDUCTION FOR BUSINESSES WITH CERTAIN BASE INCOMES AND THAT EMPLOY AT LEAST ONE FULL-TIME-EQUIVALENT EMPLOYEE.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF NEW MEXICO:

     SECTION 1. A new section of the Income Tax Act is enacted to read:

     "[NEW MATERIAL] SMALL BUSINESS INCOME TAX DEDUCTION.--

          A. For each taxable year ending prior to January 1, 2027, a taxpayer who is not a dependent of another individual, who materially participates in the business activity of a qualified small business and who earns qualified small business income in a taxable year may claim a deduction from net income for the qualified small business income the taxpayer earned in that taxable year. The tax deduction provided by this section may be referred to as the "small business income tax deduction".

          B. Subject to the limitations in Subsections C and D of this section, the amount of small business income tax deduction that may be claimed in a taxable year shall equal:

                (1) fifty percent of the first fifty thousand dollars ($50,000) in qualified small business income;

                (2) forty percent of the second fifty thousand dollars ($50,000) in qualified small business income;

                (3) thirty percent of the third fifty thousand dollars ($50,000) in qualified small business income;

                (4) twenty percent of the fourth fifty thousand dollars ($50,000) in qualified small business income;

                (5) ten percent of the fifth fifty thousand dollars ($50,000) in qualified small business income; and

                (6) zero percent of qualified small business income that exceeds two hundred fifty thousand dollars ($250,000).

          C. A taxpayer shall not be eligible to claim a small business income tax deduction if:

                (1) for married individuals filing separate returns, single individuals and estates and trusts, the taxpayer's base income is greater than two hundred fifty thousand dollars ($250,000);

                (2) for heads of household, the taxpayer's base income is greater than three hundred thousand dollars ($300,000); and

                (3) for surviving spouses and married individuals filing joint returns, the taxpayer's base income is greater than three hundred fifty thousand dollars ($350,000).

          D. The small business income tax deduction shall not reduce a taxpayer's income tax liability to less than zero for the taxable year in which the deduction is claimed.

          E. Married individuals filing separate returns for a taxable year for which they could have filed a joint return may each claim only one-half of the small business income tax deduction that would have been claimed on a joint return.

          F. A taxpayer allowed a deduction pursuant to this section shall report the amount of the deduction to the department in a manner required by the department.

          G. The department shall compile an annual report on the deduction provided by this section that shall include the number of taxpayers that claimed the deduction, the aggregate amount of deductions claimed and any other information necessary to evaluate the effectiveness of the deduction. The department shall compile and present the annual report to the revenue stabilization and tax policy committee and the legislative finance committee.

          H. As used in this section:

                (1) "full-time-equivalent employee" means:

                     (a) an employee who works an average of at least thirty-two hours per week for a minimum of twenty-six weeks per year; or

                     (b) a combination of employees, each of whom does not individually work an average of at least thirty- two hours per week, but who collectively work an average of at least thirty-two hours per week for a minimum of twenty-six weeks per year;

                (2) "material participation" means the taxpayer is an equity owner of a qualified small business and:

                     (a) in at least five of the previous ten taxable years, the taxpayer: 1) performs more than five hundred hours conducting the business activity of the qualified small business; 2) performs all, or nearly all, of the business activity of the qualified small business; or 3) performs at least one hundred hours in the business activity of the qualified small business and no other person performs more hours than the taxpayer conducting the business activities of the qualified small business;

                     (b) the taxpayer performs the business activity of the qualified small business that is a personal service activity and the taxpayer directly participates in the personal service activity in any of the three previous taxable years; or

                     (c) based on all of the facts and circumstances, the taxpayer participates in the business activity of the qualified small business on a regular, continuous and substantial basis and performs at least one hundred hours of work for the qualified small business in the taxable year in which the taxpayer claims a small business income tax deduction;

                (3) "qualified small business" means a business that:

                     (a) is a sole proprietorship or an entity treated as a partnership or disregarded entity for federal income tax purposes;

                     (b) has its principal place of business in New Mexico;

                     (c) has gross income for federal income tax purposes of one million dollars ($1,000,000) or less for the taxable year in which the taxpayer claims a small business income tax deduction; and

                     (d) employs: 1) at least one full-time-equivalent employee if the business's gross income for federal income tax purposes is less than two hundred fifty thousand dollars ($250,000) for the taxable year in which the taxpayer claimed a small business income tax deduction; 2) at least two full-time-equivalent employees if the business's gross income for federal income tax purposes is two hundred fifty thousand dollars ($250,000) or greater but less than five hundred thousand dollars ($500,000) for the taxable year in which the taxpayer claimed a small business income tax deduction; 3) at least three full-time-equivalent employees if the business's gross income for federal income tax purposes is five hundred thousand dollars ($500,000) or greater but less than seven hundred fifty thousand dollars ($750,000) for the taxable year in which the taxpayer claimed a small business income tax deduction; or 4) at least four full-time-equivalent employees if the business's gross income for federal income tax purposes is greater than seven hundred fifty thousand dollars ($750,000) but less than one million dollars ($1,000,000) for the taxable year in which the taxpayer claimed a small business income tax deduction; and

                (4) "qualified small business income" means any form of income, compensation or remuneration that is included in the taxpayer's base income for the taxable year in which the taxpayer claims a small business income tax deduction and that the taxpayer derives from the taxpayer's material participation in a qualified small business during the taxable year."

     SECTION 2. APPLICABILITY.--The provisions of this act apply to taxable years beginning on or after January 1, 2017.

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