chun kerr dodd beaman & wong1 84601.6 rev. 2008 note: recently enacted act 178 (session laws of...

Chun Kerr Dodd Beaman & Wong 184601.6 Rev. 2008

Note: recently enacted Act 178 (Session Laws of Hawaii, 2009) has made

significant changes to the tax incentives discussed herein. An updated

powerpoint presentation will be uploaded shortly, but in the meantime, please

consult with a tax advisor to learn about the newly enacted changes.


Act 221 QHTB Tax Incentives as revised Act 215 (2004)*

100% Investment Credit 2

QHTB1

Stock/Equity Option income - excluded from income tax for employees, officers, directors

1QHTB = > 50% devoted to Qualified Research (QR) & > 75% QR in Hawaii: - R & D - Software development* - Biotechnology - Performing arts products - Sensors and optics - Ocean sciences - Astronomy - Non-fossil fuel energy-related technology

2100% Investment Credit:QHTB must be Hawaii-based (property, capital or property in Hawaii) and:• more than 75% of QR in Hawaii; or• more than 75% of gross income derived from QR on sales from and mfr. in Hawaii

Revenues $$

20% R&D Credit*• Refundable• No base limitation

Royalty & license fees excluded from income tax


Allocate ITC to provide multiple credits

Tax-indifferent partners*

Hawaii tax-averse partners

Special PurposePartnership or LLC

HAWAIIQHTB

Allocate full $2M ITC**

$1M

$1M

$2M

*Usually obtains more equity interest in partnership or LLC to compensate for giving up credits

**Allocation allowed by statute: HRS Section 235-2.45(d)

Limitations: see slide 11


Non-QHTB Tax Incentives

4% Hi-tech Renovation Credit (added 2001)•hi-speed telecom• security• environmental • electrical power

General Excise Tax Exemptions •Exports•Scientific contracts

• Capital goods excise tax credit—4% taken off income tax

•Pyramiding relief phased in•Related Party Exemptions

Enterprise Zones• Income tax holiday• GET holiday• Property tax holiday•UI holiday

Foreign Trade Zone

Movie Production Credit Renewable

Energy Tax Credit


Hawaii High Technology Initiatives (Act 221)

• In order to encourage the growth of high technology businesses in Hawaii, the legislature has provided a number of tax incentives for qualified high technology businesses (QHTBs):

– 100% high technology investment tax credit for investors (ITCs)

– Refundable 20% tax credit for research expenditures (R&D credit) [Act 215]

– Income tax exclusion for (a) royalties and (b) stock-related transactions

– Increase capital loss carryforward period


Qualified High Technology Business (QHTB)

• Definition:– A business, employing or owning capital or property,

or maintaining an office, in Hawaii provided that:• > 50% of its total business is in qualified research and > 75%

of its qualified research is performed in Hawaii (Activity test)

or• > 75% of its gross income is derived from qualified research

and the income is received from (1) products sold from, manufactured in, or produced in Hawaii or (2) services

performed in Hawaii (Income test)


QHTB

• “Qualified research”– Research and development under Internal Revenue Code

Section 41

– Computer software development for sale or license

– Biotechnology

– Performing arts products

– Sensors and optics

– Ocean sciences

– Astronomy

– Non-fossil fuel energy-related technology


QHTB (con’t.)

• Businesses should obtain a QHTB comfort ruling from the State of Hawaii Department of Taxation to ensure that they qualify as a QHTB– Form A-9 (Request for a High Tech Comfort Ruling)

– See Hawaii Tax Department’s website (http://hawaii.gov/tax/)

– Fee: $1,000


QHTB (con’t.)

• Annual information return filing requirement– Form N-317 (Statement by a Qualified High Technology Business)

• Tax year 2006 and prior years– Paper form due on April 20 following the tax year

• Tax year 2007 and forward (Act 206)

– Online form on the Hawaii Tax Department’s website

– Due June 30 following the tax year

– $1,000 per month penalty for failure to file ($6,000 max)

– Effective: July 1, 2007 (applies to investments received after June 30, 2007)


High technology business investment tax credit (ITC)

• Tax incentive for investors in a QHTB• Nonrefundable 100% income tax credit on

investments made into a QHTB • Limited to $2 million per QHTB per year

• Claimed over a five year period– First year - 35% (up to $700,000)– Second year - 25% (up to $500,000)– Third year - 20% (up to $400,000)– Fourth year - 10% (up to $200,000)– Fifth year - 10% (up to $200,000)

• Effective 2001 - 2010


Filing requirements to claim ITC [Act 215]

• Three step process:– Taxpayer files for certification

• Form N-318A (Statement of Investment in a Qualified High Technology Business)

• Due March 30 following the tax year• Fee:

– Filed by investor ($100 early filing; $150 regular filing)– Filed by QHTB on investors’ behalf ($750 early filing; $1,000 regular filing)

– Tax Department sends “approval” to taxpayer• Form N-318A page 2

– Taxpayer attaches “approval” to tax return (claim) with Form N-318 (High Technology Business Investment Tax Credit)

• The claim for the ITC must be made within 12 months following the close of the tax year


Limitation on allocating ITC to provide multiple credits [TIR 2007-02]

• For each dollar invested, if the ITC allocation ratio to an investor

Is Then

<1.5 Hawaii tax department will not challenge because of safe harbor

1.5 - 2 Hawaii tax department may challenge for economic substance or business purpose

- Safe harbor available if satisfies both tests: (1) no frontloading of credits test and (2) limited equity shifting test

>2 Taxpayers are required to substantiate by proving economic substance and business purpose


Tax credit for research activities (R&D credit)

• Tax incentive available to QHTBs• Refundable 20% tax credit on qualified

research expenditures– Standard to qualify is the same as federal R&D

credit except:• No base amount limitation so credit applies to all qualified

research expenditures, not just on the amount of increase

• Research must be performed in Hawaii

• Effective 2001 - 2010


R&D Credit

• Qualified research expenses are limited to expenditures for:– Employee wages (Hawaii W-2)– Supplies (nondepreciable tangible personal

property consumed in Hawaii)– Contract research (services performed in

Hawaii by 3rd parties)


Filing requirements for claiming the R&D credit [Act 215]

• Three step process:– Taxpayer files for certification

• Form N-319A (Statement of Research and Development Costs)

• Due March 30 following the tax year

• Fee: ($400 early filing; $750 regular filing)

– Tax Department sends “approval” to taxpayer• Form N-319A page 2

– Taxpayer attaches “approval” to tax return (claim) with Form N-319 (Credit for Research Activities)

• The claim for the R&D credit must be made within 12 months following the close of the tax year


Changes to R&D credit• With the enactment of Act 215, some changes were made:

– Change in the definition of computer software development

• Taxpayers must now intend to ultimately sell, license, or otherwise market the software for economic consideration

• Taxpayers must have substantial rights to the intellectual property

– Elimination of the liberal construction language• [Old language] It is the intention of the legislature that the amendments in this

Act be liberally construed.

• [New language] It is the intention of the legislature that the amendments in this Act be construed in a manner consistent with the intent of this Act.


QHTB stock rights income tax exclusion

• Tax incentive for investors of QHTBs

• Income tax exemption available for– Income earned and proceeds derived from QHTB stock

options or stock; and

– Income earned from stock of parent company of QHTB. The parent company must possess 80% of the total voting power of the stock or other interest in the QHTB, and 80% of its total value.


QHTB royalty income tax exclusion

• Tax incentive available to QHTBs

• Income tax exclusion available for royalties earned on intellectual property developed and owned by the QHTB


Other QHTB incentives

• Capital loss carryovers– Instead of 5 years, QHTBs may carry forward capital

losses for 15 years


Summary of QHTB formation/operation

• Initial steps– Form QHTB and related entities

– Obtain QHTB comfort ruling from Hawaii Tax Department

• Operations– Investor invests money into special purpose entity or

QHTB to generate ITC

– QHTB conducts operations to generate R&D credit, if applicable, and other tax credits


Non-QHTB Incentives• Income tax (note: multiple credits may not be

claimed on the same expenditures)– Renewable energy technologies income tax

credit– Technology infrastructure renovation income tax

credit– Capital goods excise tax credit

• General excise tax– Exemption for related party transactions


Renewable energy technologies income tax credit

• Nonrefundable income tax credit for every renewable energy technology system installed and placed in service in Hawaii after June 30, 2003– Solar thermal energy systems– Wind-powered energy systems– Photovoltaic energy systems


Renewable energy technologies income tax credit (con’t.)

• Credit amount– Solar thermal energy system

• Single family residential property – 35% of actual cost or $2,250, whichever is less

• Multi-family residential property– 35% of actual cost or $350 per unit, whichever is less

• Commercial property– 35% of actual cost or $250,000, whichever is less



• Wind-powered energy systems– Single family residential property

• 20% of actual cost or $1,500, whichever is less– Multi-family residential property

• 20% of actual cost or $200 per unit, whichever is less– Commercial property

• 20% of actual cost or $500,000, whichever is less

• Photovoltaic energy systems– Single family residential property

• 35% of actual cost or $5,000, whichever is less– Multi-family residential property

• 35% of actual cost or $350 per unit, whichever is less– Commercial property

• 35% of actual cost or $500,000, whichever is less



• Act 204 (SLH 2008) update– No credit for single family residential solar

thermal energy systems for homes with a building permit on or after January 1, 2010

– No credit for residential home developer who installs and places into service a system in 2009


Technology renovation infrastructure income tax credit

• Nonrefundable 4% income tax credit for renovation costs of commercial buildings in Hawaii to enable – high speed telecommunication, – physical security systems, – environmental systems, and – backup and emergency electrical systems.


Capital goods excise tax credit

• 4% refundable income tax credit for eligible depreciable tangible personal property placed in service and used by the taxpayer in a trade or business

• The claim for the credit must be made within 12 months following the close of the tax year


Exemption for related party transactions

• General excise tax exemption for related party transactions such as: – interest on intercompany loans,

– legal and accounting services,

– use of computer software or hardware,

– information technology services,

– database management, and

– managerial and administrative services.

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