REPORT TITLE:
Business Expense Deduction


DESCRIPTION:
Increases income tax deductions for businesses from 50% to 100%
for meals and entertainment expenses.  Allows business
entertainment deduction for club dues.  (SD1)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                        1245
THE SENATE                              S.B. NO.           S.D. 1
TWENTIETH LEGISLATURE, 1999                                
STATE OF HAWAII                                            
                                                             
________________________________________________________________
________________________________________________________________


                   A  BILL  FOR  AN  ACT

RELATING TO THE INCOME TAXATION.



BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

 1      SECTION 1.  The Hawaii state income tax law conforms to the
 
 2 Internal Revenue Code.  The Internal Revenue Code only allows a
 
 3 business to deduct fifty per cent of the actual entertainment and
 
 4 meal expenses incurred in a taxable year and does not allow a
 
 5 business to deduct club dues.  This has limited business activity
 
 6 and spending in this area in Hawaii.
 
 7      The legislature finds that allowing the full deduction for
 
 8 business meals and entertainment expenses will help to stimulate
 
 9 the State's economy.  The increased patronage of food and
 
10 beverage establishments and the additional business for other
 
11 industries will contribute to a faster recovery.
 
12      The purpose of this Act is to provide the full deduction for
 
13 business meals and entertainment expenses and to allow a
 
14 deduction for club dues as a business expense. 
 
15      SECTION 2.  Section 235-2.4, Hawaii Revised Statutes, is
 
16 amended to read as follows:
 
17      "235-2.4  Operation of certain Internal Revenue Code
 
18 provisions.(a)  Section 63 (with respect to taxable income
 
19 defined) of the Internal Revenue Code shall be operative for the
 

 
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 1 purposes of this chapter, except that the standard deduction
 
 2 amount in section 63(c) of the Internal Revenue Code shall
 
 3 instead mean:
 
 4      (1)  $1,900 in the case of:
 
 5           (A)  A joint return as provided by section 235-93, or
 
 6           (B)  A surviving spouse (as defined in section 2(a) of
 
 7                the Internal Revenue Code),
 
 8      (2)  $1,650 in the case of a head of household (as defined
 
 9           in section 2(b) of the Internal Revenue Code),
 
10      (3)  $1,500 in the case of an individual who is not married
 
11           and who is not a surviving spouse or head of household,
 
12           or
 
13      (4)  $950 in the case of a married individual filing a
 
14           separate return. 
 
15 Section 63(c)(4) shall not be operative in this State.  Section
 
16 63(c)(5) shall be operative, except that the limitation on basic
 
17 standard deduction in the case of certain dependents shall be the
 
18 greater of $500 or such individual's earned income.  Section
 
19 63(f) shall not be operative in this State.
 
20      (b)  Section 72 (with respect to annuities; certain proceeds
 
21 of endowment and life insurance contracts) of the Internal
 
22 Revenue Code shall be operative for purposes of this chapter and
 
23 be interpreted with due regard to section 235-7(a), except that
 

 
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 1 the ten per cent additional tax on early distributions from
 
 2 retirement plans in section 72(t) shall not be operative for
 
 3 purposes of this chapter.
 
 4      (c)  Section 121 (with respect to exclusion of gain from
 
 5 sale of principal residence) of the Internal Revenue Code shall
 
 6 be operative for purposes of this chapter, except that for the
 
 7 election under section 121(f), a reference to section 1034
 
 8 treatment means a reference to section 235-2.4(n) in effect for
 
 9 taxable year 1997.
 
10      (d)  Section 213 (with respect to medical, dental, etc.,
 
11 expenses) of the Internal Revenue Code shall be operative, except
 
12 that subsections (d)(1)(C) with respect to long-term care
 
13 services, (d)(1)(D) as it applies to long-term care insurance
 
14 contract premiums, (d)(7) as it applies to long-term care
 
15 insurance contract premiums, and (d)(10) as it applies to
 
16 eligible long-term care premiums shall not be operative in this
 
17 State.
 
18      (e)  Section 219 (with respect to retirement savings) of the
 
19 Internal Revenue Code shall be operative for the purpose of this
 
20 chapter.  For the purpose of computing the limitation on the
 
21 deduction for active participants in certain pension plans for
 
22 state income tax purposes, adjusted gross income as used in
 
23 section 219 as operative for this chapter means federal adjusted
 

 
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 1 gross income.
 
 2      (f)  Section 220 (with respect to medical savings accounts)
 
 3 of the Internal Revenue Code shall be operative for the purpose
 
 4 of this chapter, but only with respect to medical services
 
 5 accounts that have been approved by the secretary of the Treasury
 
 6 of the United States.
 
 7      (g)  Section 274 (with respect to disallowance of certain
 
 8 entertainment expenses) of the Internal Revenue Code shall be
 
 9 operative for the purposes of this chapter except:
 
10      (1)  Subsection (a)(3) shall not be operative and a
 
11           deduction for club dues shall be allowed; and
 
12      (2)  Subsection (n) shall be operative but the allowable
 
13           percentage of meal and entertainment expenses shall be
 
14           one hundred per cent deductible for purposes of this
 
15           chapter.
 
16      [(g)] (h)  In administering the provisions of sections 410
 
17 to 417 (with respect to special rules relating to pensions,
 
18 profit sharing, stock bonus plans, etc.), sections 418 to 418E
 
19 (with respect to special rules for multiemployer plans), and
 
20 sections 419 and 419A (with respect to treatment of welfare
 
21 benefit funds) of the Internal Revenue Code, the department of
 
22 taxation shall adopt rules under chapter 91 relating to the
 
23 specific requirements under such sections and to such other
 

 
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 1 administrative requirements under those sections as may be
 
 2 necessary for the efficient administration of sections 410 to
 
 3 419A.
 
 4      In administering sections 401 to 419A (with respect to
 
 5 deferred compensation) of the Internal Revenue Code, Public Law
 
 6 93-406, section 1017(i), shall be operative for the purposes of
 
 7 this chapter.
 
 8      In administering section 402 (with respect to the taxability
 
 9 of beneficiary of employees' trust) of the Internal Revenue Code,
 
10 the tax imposed on lump sum distributions by section 402(e) of
 
11 the Internal Revenue Code shall be operative for the purposes of
 
12 this chapter and the tax imposed therein is hereby imposed by
 
13 this chapter at the rate determined under this chapter.
 
14      [(h)] (i)  Section 468B (with respect to special rules for
 
15 designated settlement funds) of the Internal Revenue Code shall
 
16 be operative for the purposes of this chapter and the tax imposed
 
17 therein is hereby imposed by this chapter at a rate equal to the
 
18 maximum rate in effect for the taxable year imposed on estates
 
19 and trusts under section 235-51.
 
20      [(i)] (j)  Section 469 (with respect to passive activities
 
21 and credits limited) of the Internal Revenue Code shall be
 
22 operative for the purposes of this chapter.  For the purpose of
 
23 computing the offset for rental real estate activities for state
 

 
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 1 income tax purposes, adjusted gross income as used in section 469
 
 2 as operative for this chapter means federal adjusted gross
 
 3 income.
 
 4      [(j)] (k)  Sections 512 to 514 (with respect to taxation of
 
 5 business income of certain exempt organizations) of the Internal
 
 6 Revenue Code shall be operative for the purposes of this chapter
 
 7 as provided in this subsection.
 
 8      "Unrelated business taxable income" means the same as in the
 
 9 Internal Revenue Code, except that in the computation thereof
 
10 sections 235-3 to 235-5, and 235-7 (except subsection (c)), shall
 
11 apply, and in the determination of the net operating loss
 
12 deduction there shall not be taken into account any amount of
 
13 income or deduction which is excluded in computing the unrelated
 
14 business taxable income.  Unrelated business taxable income shall
 
15 not include any income from a prepaid legal service plan.
 
16      For a person described in section 401 or 501 of the Internal
 
17 Revenue Code, as modified by section 235-2.3, the tax imposed by
 
18 section 235-51 or 235-71 shall be imposed upon the person's
 
19 unrelated business taxable income.
 
20      [(k)] (l)  Section 521 (with respect to cooperatives) and
 
21 subchapter T (sections 1381 to 1388, with respect to cooperatives
 
22 and their patrons) of the Internal Revenue Code shall be
 
23 operative for the purposes of this chapter as to any cooperative
 

 
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 1 fully meeting the requirements of section 421-23, except that
 
 2 Internal Revenue Code section 521 cooperatives need not be
 
 3 organized in Hawaii.
 
 4      [(l)] (m)  Sections 527 (with respect to political
 
 5 organizations) and 528 (with respect to certain homeowners
 
 6 associations) of the Internal Revenue Code shall be operative for
 
 7 the purposes of this chapter and the taxes imposed in each such
 
 8 section are hereby imposed by this chapter at the rates
 
 9 determined under section 235-71.
 
10      [(m)] (n)  Section 641 (with respect to imposition of tax)
 
11 of the Internal Revenue Code shall be operative for the purposes
 
12 of this chapter subject to the following:
 
13      (1)  The deduction for exemptions shall be allowed as
 
14           provided in section 235-54(b).
 
15      (2)  The deduction for contributions and gifts in
 
16           determining taxable income shall be limited to the
 
17           amount allowed in the case of an individual, unless the
 
18           contributions and gifts are to be used exclusively in
 
19           the State.
 
20      (3)  The tax imposed by section 1(e) of the Internal Revenue
 
21           Code as applied by section 641 of the Internal Revenue
 
22           Code is hereby imposed by this chapter at the rate and
 
23           amount as determined under section 235-51 on estates
 

 
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 1           and trusts.
 
 2      [(n)] (o)  Section 644 (with respect to special rule for
 
 3 gain on property transferred to trust at less than fair market
 
 4 value) of the Internal Revenue Code shall be operative for the
 
 5 purposes of this chapter and the tax imposed therein is hereby
 
 6 imposed by this chapter at the rate determined under this
 
 7 chapter; except that the determination of the interest rate
 
 8 established under section 6621 of the Internal Revenue Code
 
 9 referred to in section 644(a)(2) of the Internal Revenue Code
 
10 shall instead be the interest rate established under section
 
11 231-39(b)(4).
 
12      [(o)] (p)  Section 667 (with respect to treatment of amounts
 
13 deemed distributed by trusts in preceding years) of the Internal
 
14 Revenue Code shall be operative for the purposes of this chapter
 
15 and the tax imposed therein is hereby imposed by this chapter at
 
16 the rate determined under this chapter; except that the reference
 
17 to tax-exempt interest to which section 103 of the Internal
 
18 Revenue Code applies in section 667(a) of the Internal Revenue
 
19 Code shall instead be a reference to tax-exempt interest to which
 
20 section 235-7(b) applies.
 
21      [(p)] (q)  Section 685 (with respect to treatment of
 
22 qualified funeral trusts) of the Internal Revenue Code shall be
 
23 operative for purposes of this chapter, except that the tax
 

 
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 1 imposed under this chapter shall be computed at the tax rates
 
 2 provided under section 235-51, and no deduction for the exemption
 
 3 amount provided in section 235-54(b) shall be allowed.  The cost-
 
 4 of-living adjustment determined under section 1(f)(3) of the
 
 5 Internal Revenue Code shall be operative for the purpose of
 
 6 applying section 685(c)(3) under this chapter.
 
 7      [(q)] (r)  Section 1212 (with respect to capital loss
 
 8 carrybacks and carryforwards) of the Internal Revenue Code shall
 
 9 be operative for the purposes of this chapter; except that for
 
10 the purposes of this chapter the capital loss carryback
 
11 provisions of section 1212 shall not be operative and the capital
 
12 loss carryforward allowed by section 1212(a) shall be limited to
 
13 five years.
 
14      [(r)] (s)  Subchapter S (sections 1361 to 1379) (with
 
15 respect to tax treatment of S corporations and their
 
16 shareholders) of chapter 1 of the Internal Revenue Code shall be
 
17 operative for the purposes of this chapter as provided in part
 
18 VII.
 
19      [(s)] (t)  Subchapter C (sections 6221 to 6233) (with
 
20 respect to tax treatment of partnership items) of chapter 63 of
 
21 the Internal Revenue Code shall be operative for the purposes of
 
22 this chapter.
 
23      [(t)] (u)  Subchapter D (sections 6240 to 6255) (with
 

 
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 1 respect to simplified audit procedures for electing large
 
 2 partnerships) of the Internal Revenue Code shall be operative for
 
 3 the purposes of this chapter, with due regard to chapter 232
 
 4 relating to tax appeals.
 
 5      [(u)] (v)  Section 7518 (with respect to capital
 
 6 construction fund for commercial fishers) of the Internal Revenue
 
 7 Code shall be operative for the purposes of this chapter.
 
 8 Qualified withdrawals for the acquisition, construction, or
 
 9 reconstruction of any qualified asset which is attributable to
 
10 deposits made before the effective date of this section shall not
 
11 reduce the basis of the asset when withdrawn.  Qualified
 
12 withdrawals shall be treated on a first-in-first-out basis."
 
13      SECTION 3.  Statutory material to be repealed is bracketed.
 
14 New statutory material is underscored.
 
15      SECTION 4.  This Act, upon its approval, shall apply to
 
16 taxable years beginning after December 31, 1998.