Sole Proprietor Taxes in NH and MA

Today I read up on business taxes in New Hampshire. We in Massachusetts are brought up to believe that there is no income tax in NH, but it turns out there is a business profits tax that applies to sole proprietorships as well as corporations and other business forms. For many types of sole proprietors who can deduct their service to the business from the net, it's probably a great deal.

Unfortunately...

The long and short of it is I'd need to hire an accountant to do my taxes up there or have a long sitdown with the state tax people first. Despite having no income tax for salary employees, they have an 8.5% business profits tax that applies to sole proprietors. They also have a business assets tax, that may or may not apply (higher threshold), but it's .75%, so less of a worry. The way I read it, the business profits tax filing has a threshold, under $50,000 you don't have to file at all. Above $50,000, you file and pay taxes on all of the income that isn't proprietor salary. Here's where the trick comes in. While in theory, you could deduct the whole Schedule C profit as proprietor salary, you have to show that it's for services performed by the proprietor. I believe they mean current year services. That's great for somebody who is selling their time, but I'm in the business of developing assets. Under audit conditions, they might treat my books and my website as "assets", and myself as a lazy or lousy employee whose services to the company aren't worth very much, regardless of hours worked. If that turned out to be the case, I could end up paying the 8.5% plus the .75% on the majority of my income, essentially a 9% state tax, as compared to 5.X% in MA.

assumedly, there's some middle road, and maybe the right accountant would encourage me to treat almost 100% of my business income as proprietor service pay, but who knows if it would hold up. It would probably be safer to spend the money to set up a real corporation and take a fixed salary, but the overhead in accounting and fees would certainly fun into several thousand dollar a year. I guess the "Live Free or Die" only applies to employees.

Morris