Report Title:

Corporation Income Tax

Description:

Repeals the corporate income tax law.

THE SENATE

S.B. NO.

2188

TWENTY-SECOND LEGISLATURE, 2004

 

STATE OF HAWAII

 


 

A BILL FOR AN ACT

 

RELATING TO CORPORATE INCOME TAX.

 

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

SECTION 1. The purpose of this Act is to repeal the State corporate income tax law.

SECTION 2. Section 235-1, Hawaii Revised Statutes, is amended as follows:

1. By amending the definition of "individual" to read as follows:

""Individual" means a person other than a trust, estate, or partnership, [or corporation,] as defined."

2. By amending the definition of "person" to read as follows:

""Person" includes an individual, a trust, estate, partnership, association, or company [, or corporation]."

3. By deleting the definition "corporation".

[""Corporation" means the same as in the Internal Revenue Code. A "domestic corporation" is one organized under the laws of the State. A "foreign corporation" is any other corporation."]

4. By deleting the definition "regulated investment company".

[""Regulated investment company" means a corporation which qualifies as such under sections 851 and 852 of the Internal Revenue Code."]

SECTION 3. Section 235-2, Hawaii Revised Statutes, is amended to read as follows:

"§235-2 Same; "Internal Revenue Code". "Internal Revenue Code" means the Internal Revenue Code of 1954 as it applies to the determination of gross income, adjusted gross income, and taxable income, except those provisions of the Internal Revenue Code which pursuant to this chapter do not apply. For each taxable year specified in column 1 below the Internal Revenue Code meant is the Internal Revenue Code of 1954 as amended as of June 7, 1957 and as further amended by the acts of Congress, or portions thereof, enumerated in column 2 (section numbers in column 2 are inclusive). Amendments to the Code not herein enumerated shall not be operative for the purposes of this chapter unless specifically adopted.

 

Column 1

Column 2

Taxable year beginning on or after January 1, 1958, or which in whole or in part is governed by this chapter pursuant to the provisions of Act 1 of the Special Session Laws of 1957, and subsequent taxable years.

Public Laws 85-165, 85-320, and 85-367; Public Law 85-866, Title I, sections 4-12, 19, 20 (with respect to sales, exchanges, and distributions made after December 31, 1957), 21, 22, 24, 25, 28, 29 (the provisions of section 29 being applicable as agreed upon in connection with the consent of the department of taxation to the change in the method of accounting, and reading "the first taxable year beginning after December 31, 1953, and ending after August 16, 1954" as "the first taxable year governed by the Income Tax Law of 1957"), 34, 35, 37(c), 38, 43-48, 52(b), 53, 55, 95, and 97.

Taxable year beginning on or after January 1, 1959, beginning in 1958 but ending on or after June 30, 1959, and subsequent taxable years.

Public Law 85-866, Title I, sections 2 (with respect to obligations acquired after December 31, 1957), 3 (with respect to amounts received as a statutory subsistence allowance for a period after September 30, 1958), 13, 15 (with respect to the costs and improvements there designated), 17, 23, 26, 27, 30 (the provisions of section 30 being applicable to the extent they relate to deductions for contributions and gifts), 37(b) and (d), 39, 49, 50, 51, 52(a), 54, 57(a), 58 (with respect to the amounts there designated), 101 (with respect to taxable years of regulated investment companies beginning on or after March 1, 1958), Title II, sections 202, 204 (with respect to property acquired by purchase after December 31, 1958).

Taxable year beginning on or after January 1, 1961, and subsequent taxable years.

Public Law 86-564, Title III, section 302.

Taxable years beginning on or after January 1, 1962, and subsequent taxable years.

Public Law 87-834, sections 22 and 28.

Taxable years ending after December 31, 1962, but only in respect of periods after December 31, 1962.

Public Law 87-834, section 4.

Taxable year beginning on or after January 1, 1963, and subsequent taxable years.

Public Law 87-834, sections 13 and 21; Public Law 87-863, section 2.

Taxable year beginning on or after January 1, 1965.

Public Law 86-376, section 1(a); Public Law 86-470, section 3(a); Public Law 86-594, section 1; Public Law 86-779, sections 6(a), (b), and (c), 7(a) and (b); Public Law 87-256, section 110(a); Public Law 87-834, section 3(a); Public Law 87-858, section 2(a) and (b); Public Law 87-863, section 1(a) and (b); Public Law 88-4, section 1; Public Law 88-272, sections 203(d) (with respect to dispositions of elevators and escalators made in taxable years beginning on or after January 1, 1965), 204(a) (with respect to group-term life insurance provided in taxable years beginning on or after January 1, 1965), 205(a) (with respect to amounts attributable to periods of absence beginning on or after January 1, 1965), 206(a) and (b)(2)(3) and (4) (with respect to sales on or after January 1, 1965), 207(a), (b)(1)(2)(3), and (c)(2), 208(a) (with respect to losses sustained in taxable years beginning on or after January 1, 1965), 211(a), 212(a), 213(a) and (b) (with respect to expenses incurred in taxable years beginning on or after January 1, 1965), 217(a), 224(a), (b), and (c) (with respect to certain deferred payments on sales or exchanges of property occurring in taxable years beginning on or after January 1, 1965), 230(a) and (b) (with respect to capital loss carryovers in taxable years beginning on or after January 1, 1965, and further provided that in the case of a taxpayer [other than a corporation], there shall be treated as a short-term capital loss in the first taxable year beginning after December 31, 1964, any amount which is treated as a short-term capital loss in such year as in effect immediately before May 11, 1965), 231(a) and (b) (with respect to dispositions of certain depreciable realty in taxable years beginning on or after January 1, 1965).

Taxable years ending after December 31, 1965, but only with respect to compensation for periods of active service after such date.

Public Law 88-554, section 1; Internal Revenue Code of 1954, section 112, as amended by Public Law 89-739.

Taxable years ending after December 31, 1966, but only with respect to contributions made after such date.

Public Law 88-272, section 209, with the exceptions of section 209(c)(2) and section 209(f).

Taxable years beginning January 1, 1967.

Public Law 90-78, section 1.

 

Taxable year beginning on or after January 1, 1968.

Public Law 87-792, sections 2, 3, 4, 6, 7(b), 7(c), 7(d), 7(e) and 7(f); Public Law 87-863, subsections 2(a) and (b); Public Law 89-809, sections 204 and 205; Public Law 87-792, section 5.

Taxable years beginning on or after January 1, 1966.

Internal Revenue Code, section 112(d), as added by Public Law 92-279.

Taxable years beginning on or after January 1, 1975.

Public Law 91-172, sections 201(a)(1), (a)(2)(A), (b), (c), (e) and (f) (with respect to charitable contributions made on or after January 1, 1975), 212(a)(1), (a)(2), (b)(1), and (c)(1) (with respect to recapture of depreciation upon the sale of livestock made on or after January 1, 1975), 213(a), (b), and (c) (with respect to deductions attributable to activities not engaged in for profit made on or after January 1, 1975), 231(a), (b), and (c) (with respect to moving expenses made on or after January 1, 1975), 321(a), (b), and (c) (with respect to restricted property made on or after January 1, 1975), 331(a), (b), and (c) (with respect to treatment of excess distributions by trusts made on or after January 1, 1975), [411(a) and (b) (with respect to interest on indebtedness incurred by corporation to acquire stock or assets of another corporation made on or after January 1, 1975),] 412(a) (with respect to installment sale made on or after January 1, 1975), [421(a) (with respect to stock dividends made on or after January 1, 1975),] 433(b) (with respect to loss of a small business investment company made on or after January 1, 1975), 441(a) (with respect to public utility property made on or after January 1, 1975), 442(a) (with respect to earnings and profits made on or after January 1, 1975), 513(a), (b),

and (c) (with respect to capital loss limitations for individuals), 514(a) and (b) (with respect to income on sales of literary property), 515(a), (b) and (c)(1), (c)(2) and (c)(3) (with respect to lump-sum distribution from employees' plans), 516(a) (with respect to sales or other disposition of a term interest in property), 516(b) (with respect to treatment of certain casualty losses), 516(c) (with respect to treatment of franchises, trademarks and trade names), 521(a) through (f) (with respect to real estate depreciation and recapture effective on or after January 1, 1975), [531(a), (b) and (c) (with respect to qualified pension, etc., plans of small business corporation effective on or after January 1, 1975), 901(a) and (b) (with respect to casualty losses--reimbursement for increased living expenses),] 902(a) and (b) (with respect to fines and penalties, and bribes and illegal kickbacks), [905(a) and (b) (with respect to corporations using appreciated property to redeem their own stock),] 910(a), (b) and (c) (with respect to sales of certain low-income housing projects in Hawaii), 912(a) (with respect to foster child as dependent), 915(a) (with respect to replacement of property involuntarily converted within a 2-year period.) Public Law 92-178, sections 109(a), (b), (d)(1)(2), and (e) (with respect to class life system of depreciation effective on or after January 1, 1975), 302(a) and (b) with the exceptions of unused credits (with respect to limitations on carryovers of unused capital losses), 303(a) and (c) (with respect to amortization of certain expenditures for on-the-job training and for child care centers), 306(a) and (b) (with respect to capital gain distributions of certain trusts), 310(a) (with respect to bribes, kickbacks, medical referral payments), and 311(a) (with respect to activities not engaged in for profit)."

SECTION 4. Section 235-2.3, Hawaii Revised Statutes, is amended by amending subsection (b) to read as follows:

"(b) The following Internal Revenue Code subchapters, parts of subchapters, sections, subsections, and parts of subsections shall not be operative for the purposes of this chapter, unless otherwise provided:

(1) Subchapter A (sections 1 to 59A) (with respect to determination of tax liability), except section 1(h)(3) (relating to net capital gain reduced by the amount taken into account as investment income), except section 41 (with respect to the credit for increasing research activities), except section 42 (with respect to low-income housing credit), and except sections 47 and 48, as amended, as of December 31, 1984 (with respect to certain depreciable tangible personal property). For treatment, see sections 235-110.91, 235-110.7, and 235-110.8;

[(2) Section 78 (with respect to dividends received from certain foreign corporations by domestic corporations choosing foreign tax credit);]

[(3)] (2) Section 86 (with respect to social security and tier 1 railroad retirement benefits);

[(4)] (3) Section 103 (with respect to interest on state and local bonds). For treatment, see section 235-7(b);

[(5)] (4) Section 114 (with respect to extraterritorial income);

[(6)] (5) Section 120 (with respect to amounts received under qualified group legal services plans). For treatment, see section 235-7(a)(9) to (11);

[(7)] (6) Section 122 (with respect to certain reduced uniformed services retirement pay). For treatment, see section 235-7(a)(3);

[(8)] (7) Section 135 (with respect to income from United States savings bonds used to pay higher education tuition and fees). For treatment, see section 235-7(a)(1);

[(9)] (8) Subchapter B (sections 141 to 150) (with respect to tax exemption requirements for state and local bonds);

[(10)] (9) Section 151 (with respect to allowance of deductions for personal exemptions). For treatment, see section 235-54;

[(11)] (10) Section 196 (with respect to deduction for certain unused investment credits);

[(12)] (11) Section 222 (with respect to qualified tuition and related expenses);

[(13) Sections 241 to 247 (with respect to special deductions for corporations). For treatment, see section 235-7(c);

(14)] (12) Section 280C (with respect to certain expenses for which credits are allowable). For treatment, see section 235-110.91;

[(15)] (13) Section 291 (with respect to special rules relating to corporate preference items);

[(16) Section 367 (with respect to foreign corporations);

(17)] (14) Section 501(c)(12), (15), (16) (with respect to exempt organizations);

[(18)] (15) Section 515 (with respect to taxes of foreign countries and possessions of the United States);

[(19) Subchapter G (sections 531 to 565) (with respect to corporations used to avoid income tax on shareholders);

(20)] (16) Subchapter H (sections 581 to 597) (with respect to banking institutions), except section 584 (with respect to common trust funds). For treatment, see chapter 241;

[(21)] (17) Section 642(a) and (b) (with respect to special rules for credits and deductions applicable to trusts). For treatment, see sections 235-54(b) and 235-55;

[(22)] (18) Section 646 (with respect to tax treatment of electing Alaska Native settlement trusts);

[(23)] (19) Section 668 (with respect to interest charge on accumulation distributions from foreign trusts);

[(24)] (20) Subchapter L (sections 801 to 848) (with respect to insurance companies). For treatment, see sections 431:7-202 and 431:7-204;

[(25)] (21) Section 853 (with respect to foreign tax credit allowed to shareholders). For treatment, see section 235-55;

[(26)] (22) Subchapter N (sections 861 to 999) (with respect to tax based on income from sources within or without the United States), except sections 985 to 989 (with respect to foreign currency transactions). For treatment, see sections 235-4, 235-5, and 235-7(b), and 235-55;

[(27)] (23) Section 1042(g) (with respect to sales of stock in agricultural refiners and processors to eligible farm cooperatives);

[(28)] (24) Section 1055 (with respect to redeemable ground rents);

[(29)] (25) Section 1057 (with respect to election to treat transfer to foreign trust, etc., as taxable exchange);

[(30)] (26) Sections 1291 to 1298 (with respect to treatment of passive foreign investment companies);

[(31)] (27) Subchapter Q (sections 1311 to 1351) (with respect to readjustment of tax between years and special limitations);

[(32)] (28) Subchapter U (sections 1391 to 1397F) (with respect to designation and treatment of empowerment zones, enterprise communities, and rural development investment areas). For treatment, see chapter 209E; and

[(33)] (29) Subchapter W (sections 1400 to 1400C) (with respect to District of Columbia enterprise zone)."

SECTION 5. Section 235-3, Hawaii Revised Statutes, is amended to read as follows:

"§235-3 Legislative intent, how Internal Revenue Code shall apply, in general. (a) It is the intent of this chapter, in addition to the essential purpose of raising revenue, to conform the income tax law of the State as closely as may be with the Internal Revenue Code in order to simplify the filing of returns and minimize the taxpayer's burdens in complying with the income tax law. The rules and regulations, forms and procedures adopted and established under this chapter shall conform as nearly as possible, and unless there is good reason to the contrary, to the rules and regulations, forms and procedures adopted and established under the Internal Revenue Code.

(b) The Internal Revenue Code, so far as made operative by this chapter, is a statute adopted and incorporated by reference. The Internal Revenue Code shall be applied using changes in nomenclature and other language, including the omission of inapplicable language, where necessary to effectuate the intent of this section. In the Internal Revenue Code, references to terms such as:

(1) "Secretary or his delegate" shall refer to the director of taxation and the director's duly authorized subordinates;

(2) "Estate taxes" shall refer to the estate and transfer tax imposed by chapter 236D;

(3) "The highest rate of tax imposed upon individuals" or "39.6 per cent" shall refer to the highest rate imposed upon individuals under section 235-51;

[(4) "The highest rate of tax imposed upon corporations" shall refer to the highest rate imposed upon corporations under section 235-71;] and

[(5)] (4) "Interest at the underpayment rate" or "interest at the overpayment rate" shall refer to the interest rate set forth in section 231-39(b)(4) or section 231-23(d)(1), as the case may be.

(c) Where, under a provision of the Internal Revenue Code made operative in this chapter, the allowance or disallowance to a taxpayer of a deduction, exclusion, adjustment, credit, or exemption is dependent on whether, under the Internal Revenue Code or a prior applicable federal income tax law, the following was or was not, is or is not, in relation to the same taxpayer or another taxpayer, for the same taxable year or a prior taxable year, an operative factor: the imposition or payment of an income tax, an inclusion in gross income, an exclusion from gross income, or a deduction from gross income--the allowance or disallowance under this chapter of such deduction, exclusion, adjustment, credit, or exemption shall depend on the operativeness of such factor or factors under this chapter or a prior applicable income tax law of the State. This subsection shall govern the application of such sections of the Internal Revenue Code as, for example, sections 111, 215, 668(b), and 7852(c) and all matters of a similar nature.

[(d) Whenever, in a taxable year of a corporation or its shareholders not governed by the income tax law of 1957, a distribution of money, stock, securities, or other property (whether in complete or partial liquidation or otherwise) has been made by a corporation to shareholders owning such shares in the State, or stock, securities, or other property has been transferred to a corporation, or corporate stock or securities exchanged, in the course of a corporate organization or reorganization effected under the laws of the State, in the application of the income tax law of 1957 effect shall be given to the recognition of income by the income tax laws of 1901 and 1932, if any, to the extent necessary to avoid double taxation, for example, in determining the earnings and profits of any corporation involved or the basis of any stock, securities, or other property so received, transferred, or exchanged. No increase in basis shall be allowed on account of such events in taxable years not governed by the income tax law of 1957, except as provided by this subsection. As used in this subsection the words "double taxation" mean and refer to double taxation of the same taxpayer, or taxation of both a corporation and its shareholders when the taxation of both would not have occurred had the income tax law of 1957 governed prior taxable years.

(e)] (d) In the determination of the basis or adjusted basis of any [stock,] securities[,] or other property:

(1) If the property was acquired by an exchange (including an involuntary conversion or the sale of an old residence and purchase of a new residence where both occur within a one-year period) the "cost" thereof to the taxpayer shall be deemed to include among other things, any income of the taxpayer recognized by the income tax laws of 1901 and 1932 as a result of the exchange;

(2) If the basis is dependent upon acquisition from a decedent, the property shall be deemed to have been acquired from a decedent if deemed so acquired for the purposes of chapter 236 prior to July 1, 1983, or after June 30, 1983, under this chapter but not otherwise, and the residence or nonresidence of the decedent, the location of the property, and chapter 236 for property acquired prior to July 1, 1983, or this chapter where the property has been acquired after June 30, 1983, shall be considered;

(3) If the basis is dependent upon deductions, exclusions, or exemptions taken or allowable, under the Internal Revenue Code or a prior applicable federal income tax law, in a prior year, it shall depend upon deductions, exclusions, or exemptions taken or allowable under the income tax law of the State governing such prior years;

(4) If the basis is dependent upon the election provided for by section 307, Internal Revenue Code, it shall be governed by the election actually made under the Internal Revenue Code for the taxable year, whether or not the taxable year was governed by the income tax law of 1957."

SECTION 6. Section 235-4, Hawaii Revised Statutes, is amended to read as follows:

"§235-4 Income taxes by the State; residents, nonresidents, [corporations,] estates, and trusts. (a) Residents. The tax imposed by this chapter applies to the entire income of a resident, computed without regard to source in the State.

(b) Nonresidents. In the case of a nonresident, the tax applies to the income received or derived from property owned, personal services performed, trade, or business carried on, and any and every other source in the State.

In the case of a nonresident spouse filing a joint return with a resident spouse, the tax applies to the entire income of the nonresident spouse computed without regard to source in the State.

(c) Change of status. Except where a joint return is filed, when the status of a taxpayer changes during the taxable year from resident to nonresident, or from nonresident to resident, the tax imposed by this chapter applies to the entire income earned during the period of residence in the manner provided in subsection (a) of this section and during the period of nonresidence the tax shall apply upon the income received or derived as a nonresident in the manner provided in subsection (b) of this section; provided that if it cannot be determined whether income was received or derived during the period of residence or during the period of nonresidence, there shall be attributed to the State such portion of the income as is determined by applying to such income for the whole taxable year the ratio which the period of residence in the State bears to the whole taxable year, unless the taxpayer shows to the satisfaction of the department of taxation that the result is to attribute to the state income, dependent upon residence, received or derived during the period of nonresidence, in which event the amount of income as to which such showing is made shall be excluded.

The apportionment of income provided by this subsection shall not apply where one spouse is a resident of this State and a joint return is filed with the nonresident spouse in which event the tax shall be computed on their aggregate income in the manner provided in section 235-52 without regard to source in the State. Where, however, both spouses change their status from resident to nonresident or from nonresident to resident, their income shall be apportioned in the manner provided in this subsection.

[(d) A corporation, foreign or domestic, is taxable upon the income received or derived from property owned, trade or business carried on, and any and every other source in the State. In addition thereto a domestic corporation is taxable upon its income from property owned, trade or business carried on, and any and every other source outside the State, unless subjected to income tax thereon in any other jurisdiction. Subjection to federal tax does not constitute subjection to income tax in another jurisdiction. "Corporation" includes any professional corporation incorporated pursuant to chapter 415A or 416.

(e)] (d) (1) The income of a resident estate or trust shall be computed without regard to source in the State. The income of a nonresident estate or trust shall be that received or derived from sources in the State.

(2) A beneficiary of an estate or trust, or person treated as the owner of any portion of a trust, who is taxable upon income thereof under the Internal Revenue Code, shall be taxed thereon as herein provided, irrespective of the taxability of the estate or trust or whether it is required to make a fiduciary return under this chapter. If all such income consists of income which would be taxable under this chapter if received directly by the beneficiary or person, the beneficiary or person shall be taxed upon all of it. If some of it consists of income which would not be taxable if received directly by the beneficiary or person, then unless the trust instrument provides otherwise the income of each such beneficiary or person shall be conclusively presumed to have been received or derived out of each class of income of the estate or trust, and the beneficiary or person shall be taxed upon such part of it as would be taxable if received directly by the beneficiary or person.

(3) Each estate or trust shall include in its return all of the information necessary to determine the taxability of the income of the estate or trust, regardless of source. Only in the case of a nonresident estate or trust of which all the beneficiaries are nonresidents and no part of which is treated as owned by a resident shall the return be confined to income from sources in the State. This paragraph shall not cause income to be taxed to an estate or trust that otherwise would not have been so taxed."

SECTION 7. Section 235-7, Hawaii Revised Statutes, is amended to read as follows:

"§235-7 Other provisions as to gross income, adjusted gross income, and taxable income. (a) There shall be excluded from gross income, adjusted gross income, and taxable income:

(1) Income not subject to taxation by the State under the Constitution and laws of the United States;

(2) Rights, benefits, and other income exempted from taxation by section 88-91, having to do with the state retirement system, and the rights, benefits, and other income, comparable to the rights, benefits, and other income exempted by section 88-91, under any other public retirement system;

(3) Any compensation received in the form of a pension for past services;

(4) Compensation paid to a patient affected with Hansen's disease employed by the State or the United States in any hospital, settlement, or place for the treatment of Hansen's disease;

(5) Except as otherwise expressly provided, payments made by the United States or this State, under an act of Congress or a law of this State, which by express provision or administrative regulation or interpretation are exempt from both the normal and surtaxes of the United States, even though not so exempted by the Internal Revenue Code itself;

(6) Any income expressly exempted or excluded from the measure of the tax imposed by this chapter by any other law of the State, it being the intent of this chapter not to repeal or supersede any such express exemption or exclusion;

(7) The first $1,750 received by each member of the reserve components of the Army, Navy, Air Force, Marine Corps, or Coast Guard of the United States of America, and the Hawaii national guard as compensation for performance of duty;

(8) Income derived from the operation of ships or aircraft if the income is exempt under the Internal Revenue Code pursuant to the provisions of an income tax treaty or agreement entered into by and between the United States and a foreign country, provided that the tax laws of the local governments of that country reciprocally exempt from the application of all of their net income taxes, the income derived from the operation of ships or aircraft which are documented or registered under the laws of the United States;

(9) The value of legal services provided by a prepaid legal service plan to a taxpayer, the taxpayer's spouse, and the taxpayer's dependents;

(10) Amounts paid, directly or indirectly, by a prepaid legal service plan to a taxpayer as payment or reimbursement for the provision of legal services to the taxpayer, the taxpayer's spouse, and the taxpayer's dependents;

(11) Contributions by an employer to a prepaid legal service plan for compensation (through insurance or otherwise) to the employer's employees for the costs of legal services incurred by the employer's employees, their spouses, and their dependents; and

(12) Amounts received in the form of a monthly surcharge by a utility acting on behalf of an affected utility under section 269-16.3 shall not be gross income, adjusted gross income, or taxable income for the acting utility under this chapter. Any amounts retained by the acting utility for collection or other costs shall not be included in this exemption.

(b) There shall be included in gross income, adjusted gross income, and taxable income: (1) unless excluded by this chapter relating to the uniformed services of the United States, cost-of- living allowances and other payments exempted by section 912 of the Internal Revenue Code, but section 119 of the Internal Revenue Code nevertheless shall apply; (2) unless expressly exempted or excluded as provided by subsection (a)(6), interest on the obligations of a State or a political subdivision thereof.

[(c) The deductions of or based on dividends paid or received, allowed to a corporation under chapter 1, subchapter B, Part VIII of the Internal Revenue Code, shall not be allowed. In lieu thereof there shall be allowed as a deduction the entire amount of dividends received by any corporation upon the shares of stock of a national banking association, qualifying dividends, as defined in section 243(b) of the Internal Revenue Code, received by members of an affiliated group, or dividends received by a small business investment company operating under the Small Business Investment Act of 1958 (Public Law 85-699) upon shares of stock qualifying under paragraph (3), seventy per cent of the amount received by any corporation as dividends:

(1) Upon the shares of stock of another corporation, if at the date of payment of the dividend at least ninety- five per cent of the other corporation's capital stock is owned by one or more corporations doing business in this State and if the other corporation is subjected to an income tax in another jurisdiction (but subjection to federal tax does not constitute subjection to income tax in another jurisdiction);

(2) Upon the shares of stock of a bank or insurance company organized and doing business under the laws of the State;

(3) Upon the shares of stock of another corporation, if at least fifteen per cent of the latter corporation's business, for the taxable year of the latter corporation preceding the payment of the dividend, has been attributed to this State.

However, except for national bank dividends, the deductions under this subsection are not allowed when they would not have been allowed under section 243 of the Internal Revenue Code, as amended by Public Law 85-866, by reason of subsections (b) and (c) of section 246 of the Internal Revenue Code. For the purposes of this subsection fifteen per cent of a corporation's business shall be deemed to have been attributed to this State if fifteen per cent or more of the entire gross income of the corporation as defined in this chapter (which for the purposes of this subsection shall be computed without regard to source in the State and shall include income not taxable by reason of the fact that it is from property not owned in the State or from a trade or business not carried on in the State in whole or in part), under section 235-5 and the other provisions of this chapter, shall have been attributed to the State and subjected to assessment of the taxable income therefrom (including the determination of the resulting net loss, if any).

(d)] (c) (1) For taxable years ending before January 1, 1967, the net operating loss deductions allowed as carrybacks and carryovers by the Internal Revenue Code shall not be allowed. In lieu thereof the net operating loss deduction shall consist of the excess of the deductions allowed by this chapter over the gross income, computed with the modifications specified in paragraphs (1) to (4) of section 172(d) of the Internal Revenue Code, and with the further modification stated in paragraph (3) hereof; and shall be allowed as a deduction in computing the taxable income of the taxpayer for the succeeding taxable year;

(2) (A) With respect to net operating loss deductions resulting from net operating losses for taxable years ending after December 31, 1966, the net operating loss deduction provisions of the Internal Revenue Code shall apply; provided that there shall be no net operating loss deduction carried back to any taxable year ending prior to January 1, 1967;

(B) In the case of a taxable year beginning in 1966 and ending in 1967, the entire amount of all net operating loss deductions carried back to the taxable year shall be limited to that portion of taxable income for such taxable year which the number of days in 1967 bears to the total days in the taxable year ending in 1967; and

(C) The computation of any net operating loss deduction for a taxable year covered by this subsection shall require the further modifications stated in paragraphs (3), (4), and (5) of this subsection;

(3) In computing the net operating loss deduction allowed by this subsection, there shall be included in gross income the amount of interest which is excluded from gross income by subsection (a), decreased by the amount of interest paid or accrued which is disallowed as a deduction by subsection (e)[. In determining the amount of the net operating loss deduction under this subsection of any corporation, there shall be disregarded the net operating loss of such corporation for any taxable year for which the corporation is an electing small business corporation];

(4) No net operating loss carryback or carryover shall be allowed by this chapter if not allowed under section 172 of the Internal Revenue Code;

(5) The election to relinquish the entire carryback period with respect to a net operating loss allowed under section 172(b)(3)(C) of the Internal Revenue Code shall be operative for the purposes of this chapter; provided that no taxpayer shall make such an election as to a net operating loss of a business where such net operating loss occurred in the taxpayer's business prior to the taxpayer entering business in this State; and

(6) The five-year carryback period for net operating losses for any taxable year ending during 2001 and 2002 in section 172(b)(1)(H) of the Internal Revenue Code shall not be operative for purposes of this chapter.

[(e)] (d) There shall be disallowed as a deduction the amount of interest paid or accrued within the taxable year on indebtedness incurred or continued, (1) to purchase or carry bonds the interest upon which is excluded from gross income by subsection (a); or (2) to purchase or carry property owned without the State, or to carry on trade or business without the State, if the taxpayer is a person taxable only upon income from sources in the State.

[(f)] (e) Losses of property as the result of tidal wave, hurricane, earthquake, or volcanic eruption, or as a result of flood waters overflowing the banks or walls of a river or stream, or from any other natural disaster, to the extent of the amount deductible, under this chapter, not compensated for by insurance or otherwise, may be deducted in the taxable year in which sustained, or at the option of the taxpayer may be deducted in equal installments over a period of five years, the first such year to be the calendar year or fiscal year of the taxpayer in which such loss occurred.

[(g)] (f) In computing taxable income there shall be allowed as a deduction:

(1) Political contributions by any taxpayer not in excess of $250 in any year; provided that such contributions are made to a central or county committee of a political party whose candidates shall have qualified by law to be voted for at the immediately previous general election; or

(2) Political contributions by any individual taxpayer in an aggregate amount not to exceed $1,000 in any year; provided that such contributions are made to candidates as defined in section 11-191, who have agreed to abide by the campaign expenditure limits as set forth in section 11-209; and provided further that not more than $250 of an individual's total contribution to any single candidate shall be deductible for purposes of this section."

SECTION 8. Section 235-12, Hawaii Revised Statutes, is amended by amending subsections (a) and (b) to read as follows:

"(a) For taxable years ending before January 1, 1990, except in the case of ice storage systems for taxable years ending before January 1, 1991, each individual [and corporate] resident taxpayer who files an individual [or corporate] net income tax return for a taxable year, may claim a tax credit under this section against the Hawaii state individual [or corporate] net income tax. The tax credit may be claimed for any solar or wind energy device, heat pump, or ice storage system in an amount not to exceed ten per cent of the total cost of the device, heat pump, or ice storage system; provided that the tax credit shall apply only to the actual cost of the solar or wind energy device, the heat pump, or ice storage system, their accessories, and installation and shall not include the cost of consumer incentive premiums unrelated to the operation of the solar or wind energy device, the heat pump, or ice storage system offered with the sale of the solar or wind energy device, the heat pump, or ice storage system. The credit shall be claimed against net income tax liability for the year in which the solar or wind energy device, the heat pump, or ice storage system was purchased and placed in use; provided:

(1) The tax credit shall be applicable only with respect to solar devices, which are erected and placed in service after December 31, 1974, but before January 1, 1990;

(2) In the case of wind energy devices and heat pumps, the tax credit shall be applicable only with respect to wind energy devices and heat pumps which are installed and placed in service after December 31, 1980, but before January 1, 1990; and

(3) In the case of ice storage systems, the tax credit shall be applicable only with respect to ice storage systems which are installed and placed in service after December 31, 1985, but before January 1, 1990.

Tax credits which exceed the taxpayer's income tax liability may be used as a credit against the taxpayer's income tax liability in subsequent years until exhausted. If federal energy tax credits are not extended beyond December 31, 1985, are not retroactively extended or reenacted, or federal energy tax credits the same as or less in amount than the credits in effect during the 1985 taxable year are not enacted during the taxable year 1986, then the state tax credit shall be increased to fifteen per cent of the total cost after December 31, 1985, but before January 1, 1990.

As used in this subsection:

"Solar or wind energy device" means any new identifiable facility, equipment, apparatus, or the like which makes use of solar or wind energy for heating, cooling, or reducing the use of other types of energy dependent upon fossil fuel for their generation.

"Heat pump" means and refers to an electric powered compression heating system which extracts energy from warm ambient air or recovers waste heat to assist in the production of hot water.

"Ice storage system" refers to ice banks or other cool energy storage tanks, containers, accessories, and controls that are specifically designed to store ice or chilled fluids for the express purpose of shifting the consumption of energy to off-peak periods.

(b) For taxable years beginning after December 31, 1989, each individual [or corporate] resident taxpayer who files an individual [or corporate] net income tax return for a taxable year, may claim a tax credit under this section against the Hawaii state individual [or corporate] net income tax. The tax credit may be claimed as follows:

(1) For wind energy systems that are installed and placed in service after December 31, 1989, but before July 1, 2003, the credit shall be twenty per cent of the actual cost;

(2) For solar energy systems that are installed and placed in service after December 31, 1989, but before July 1, 2003, on new and existing single family residential buildings, the credit shall be in an amount not to exceed thirty-five per cent or $1,750, whichever is less, of the actual cost of the solar energy system;

(3) For solar energy systems that are installed and placed in service after December 31, 1989, but before July 1, 2003, on new and existing multiunit buildings used primarily for residential purposes, the credit shall be in an amount not to exceed thirty-five per cent or $350 per building unit, whichever is less, of the actual cost of the solar energy system;

(4) For solar energy systems that are installed and placed in service after December 31, 1989, but before July 1, 2003, in new and existing hotel, commercial, and industrial facilities, the credit shall be in an amount not to exceed thirty-five per cent of the actual cost of the solar energy system;

(5) For heat pumps that are installed and placed in service after December 31, 1989, but before July 1, 2003, in new and existing single-family residential buildings, the credit shall be in an amount not to exceed twenty per cent or $400, whichever is less, of the actual cost of the heat pump;

(6) For heat pumps that are installed and placed in service after December 31, 1989, but before July 1, 2003, in new and existing multiunit buildings used primarily for residential purposes, the credit shall be in an amount not to exceed twenty per cent or $200 per building unit, whichever is less, of the actual cost of the heat pump; provided that a licensed professional engineer reviews the design of the system and provides a written opinion that the system, in accordance with recognized engineering practice, is designed to provide not less than ninety per cent of the daily annual average hot water needs of all of the occupants of the building;

(7) For heat pumps that are installed and placed in service after December 31, 1989, but before July 1, 2003, in new and existing hotel, commercial, and industrial facilities, the credit shall be in an amount not to exceed twenty per cent of the actual cost of the heat pump; and

(8) For ice storage systems that are installed and placed in service after December 31, 1990, but before July 1, 2003, the credit shall be in an amount not to exceed fifty per cent of the actual cost of the ice storage system.

The per unit of actual cost of a solar energy system or heat pump referred to in subsection (b)(3) and (6) shall be determined by multiplying the actual cost of the solar energy system or heat pump installed and placed in service in the multiunit building by a fraction, the numerator being the total square feet of that unit in the multiunit building, and the denominator being the total square feet of all the units in the multiunit building.

If federal energy tax credits similar to any of those provided in paragraphs (1) to (8) are established after June 30, 1998, but before July 1, 2003, then the state tax credit provided in the respective paragraph or paragraphs shall be reduced by the amount of the applicable federal energy tax credit."

SECTION 9. Section 235-12.5, Hawaii Revised Statutes, is amended as follows:

1. By amending subsection (a) to read as follows:

"(a) When the requirements of subsection (c) are met, each individual [or corporate] resident taxpayer that files an individual [or corporate] net income tax return for a taxable year may claim a tax credit under this section against the Hawaii state individual [or corporate] net income tax. The tax credit may be claimed for every eligible renewable energy technology system that is installed and placed in service by a taxpayer after June 30, 2003. The tax credit may be claimed as follows:

(1) Solar thermal energy systems for:

(A) Single family residential property: thirty-five per cent of the actual cost or $1,750, whichever is less;

(B) Multi-family residential property: thirty-five per cent of the actual cost or $350 per unit, whichever is less;

(C) Commercial property: thirty-five per cent of the actual cost or $250,000, whichever is less; and

(2) Wind powered energy systems for:

(A) Single family residential property: twenty per cent of the actual cost or $1,500, whichever is less;

(B) Multi-family residential property: twenty per cent of the actual cost or $200 per unit, whichever is less; and

(C) Commercial property: twenty per cent of the actual cost or $250,000, whichever is less; and

(3) Photovoltaic energy systems for:

(A) Single family residential property: thirty-five per cent of the actual cost or $1,750, whichever is less;

(B) Multi-family residential property: thirty-five per cent of the actual cost or $350 per unit, whichever is less; and

(C) Commercial property: thirty-five per cent of the actual cost or $250,000, whichever is less;

provided that multiple owners of a single system shall be entitled to a single tax credit; and provided further that the tax credit shall be apportioned between the owners in proportion to their contribution to the cost of the system."

2. By amending subsection (e) to read as follows:

"(e) By or before December, 2005, to the extent feasible, using existing resources to assist the energy-efficiency policy review and evaluation, the department shall assist with data collection on the following:

(1) The number of renewable energy technology systems that have qualified for a tax credit during the past year by[:

(A) Technology] technology type (solar thermal, photovoltaic from the sun, and wind)[; and

(B) Taxpayer type (corporate and individual)]; and

(2) The total cost of the tax credit to the State during the past year by[:

(A) Technology] technology type[; and

(B) Taxpayer type]."

SECTION 10. Section 235-51, Hawaii Revised Statutes, is amended by amending subsection (e) to read as follows:

"(e) Any taxpayer[, other than a corporation,] acting as a business entity in more than one state who is required by this chapter to file a return may elect to report and pay a tax of .5 per cent of its annual gross sales (1) where the taxpayer's only activities in this State consist of sales; and (2) who does not own or rent real estate or tangible personal property; and (3) whose annual gross sales in or into this State during the tax year is not in excess of $100,000."

SECTION 11. Section 235-68, Hawaii Revised Statutes, is amended by amending subsection (a) to read as follows:

"(a) As used in this section:

"Nonresident person" means every person other than a resident person.

"Property" or "real property" has the meaning as the same term is defined in section 231-1.

"Resident person" means any:

(1) Individual included in the definition of resident in section 235-1;

[(2) Corporation incorporated or granted a certificate of authority under chapter 414, 414D, or 415A;

(3)] (2) Partnership formed or registered under chapter 425 or 425E;

[(4)] (3) Foreign partnership qualified to transact business pursuant to chapter 425 or 425E;

[(5)] (4) Limited liability company formed under chapter 428 or any foreign limited liability company registered under chapter 428;

[(6)] (5) Limited liability partnership formed under chapter 425;

[(7)] (6) Foreign limited liability partnership qualified to transact business under chapter 425;

[(8)] (7) Trust included in the definition of resident trust in section 235-1; or

[(9)] (8) Estate included in the definition of resident estate in section 235-1.

"Transferee" means any person, the State and the counties and their respective subdivisions, agencies, authorities, and boards, acquiring real property which is located in Hawaii.

"Transferor" means any person disposing real property which is located in Hawaii."

SECTION 12. Section 235-96, Hawaii Revised Statutes, is amended to read as follows:

"§235-96 Returns by persons making payments. By duly promulgated regulations the department of taxation may require that any individual, partnership, [corporation,] joint stock company, association, insurance company, or other person, being a resident or having a place of business in this State, in whatever capacity acting, including lessees or mortgagors of real and personal property, fiduciaries, employers, and all officers and employees of the State or of any political subdivision thereof, having the control, receipt, custody, disposal, or payment of any annuity or interest on deposits or funds held in trust, including taxable income from endowment policies, other interest (except interest coupons payable to bearer), dividends, wages, rentals, royalties, premiums, or other emoluments, gains, profits, and income, paid or payable during any year to any person, shall, on such date or dates as the department shall from time to time designate, make a return to the department furnishing the information required by the regulations."

SECTION 13. Section 235-97, Hawaii Revised Statutes, is amended as follows:

1. By amending subsection (a) to read as follows:

"(a) (1) Individuals, [corporations (including S

corporations),] estates, and trusts, shall annually furnish the department of taxation with a declaration of estimated tax for the current taxable year. Declarations of estimated tax, except as otherwise provided by rule, shall be governed by the provisions as to returns contained in sections 235-94, 235-98, 235-99, and 235-128. The declarations shall be made on estimated tax payment voucher forms. The payment voucher shall be filed, in the case of taxpayers on the calendar year basis, on or before April 20. In the case of a husband and wife who are entitled to submit a joint payment voucher for federal purposes, a single payment voucher may be submitted by them jointly, in which case the liability with respect to the estimated tax shall be joint and several; if a joint payment voucher is submitted but a joint income tax return is not made for the taxable year, the estimated tax for the year may be treated as the estimated tax of either the husband or the wife or may be divided between them.

(2) Each taxpayer shall transmit, with the payment voucher, payment of one-quarter of the estimated tax for the current taxable year. In determining this quarterly payment and all other installments, there first shall be deducted from the total estimated tax the amount of estimated tax withholding or collection at source for the taxable year. Thereafter, on the twentieth day of June and September, the taxpayer shall transmit with the payment voucher, payment of one-quarter of the estimated tax. The fourth quarter payment of the estimated tax shall be transmitted with the payment voucher by January 20 of the year following the taxable year for which the estimate was made.

(3) Taxpayers operating on a fiscal year basis shall make similar estimates and tax payments, on or before the twentieth day of the fourth month of the fiscal year and periodically thereafter so as to conform to the payments and returns required in the case of those on a calendar year basis.

(4) The department by rule may excuse individuals from filing an estimate in those cases where the gross income and exemptions are such that no tax is expected to accrue under this chapter, or are such that substantially all the tax will be collected through tax withholding or at the source.

[(5) In the case of a foreign corporation, the department may excuse the filing of an estimate and the payment of estimated tax if it is satisfied that less than fifteen per cent of the corporation's business for the taxable year will be attributable to the State. For the purposes of this paragraph, fifteen per cent of a corporation's business shall be deemed attributable to the State if fifteen per cent or more of the entire gross income of the corporation (which for the purposes of this paragraph means gross income computed without regard to source in the State) is attributable to the State under sections 235-21 to 235-39 or other provisions of this chapter.

(6)] (5) In the case of a taxpayer whose tax liability is less than $500, the filing of an estimate and the payment of estimated tax shall not be required."

2. By amending subsection (f) to read as follows:

"(f) In the case of any underpayment of estimated tax, except as provided by this subsection, there shall be added to the tax for the taxable year an amount determined at the rate of two-thirds of one per cent a month or fraction of a month upon the amount of the underpayment for the period of the underpayment.

(1) The amount of the underpayment shall be the excess of:

(A) The required installment, over

(B) The amount, if any, of the installment paid on or before the due date for the installment.

(2) The period of the underpayment shall run from the due date for the installment to whichever of the following dates is the earlier:

(A) The twentieth day of the fourth month following the close of the taxable year, or

(B) With respect to any portion of the underpayment, the date on which the portion is paid. For purposes of this paragraph, a payment of estimated tax on any installment date shall be credited against unpaid required installments in the order in which the installments are required to be paid.

(3) For the purposes of this section, the term "tax" means the tax imposed under this chapter reduced by any credits available to the taxpayer other than the credit for amounts withheld from the taxpayer's wages or taxes withheld at the source, if any, or estimated tax payments or payments remitted with extension requests for the taxable year.

(4) Sections 6654(d), (e)(2), (e)(3), (h), (i), (j), (k), and (l), (with respect to failure by an individual to pay estimated income tax)[, and 6655(d), (e), (g)(2), (g)(3), (g)(4), and (i) (with respect to failure by a corporation to pay estimated income tax)] of the Internal Revenue Code, as of the date set forth in section 235-2.3(a), shall be operative for the purposes of this section; provided that the due dates contained in any of the preceding Internal Revenue Code sections shall be deemed to be the twentieth day of the applicable month; and provided further that, for purposes of this chapter in applying section 6654(d), the required annual payment shall be the lesser of sixty per cent of the tax shown on the return for the taxable year (or, if no return is filed, sixty per cent of the tax for the taxable year) or one hundred per cent of the tax shown on the return of the individual for the preceding taxable year."

SECTION 14. Section 235-98, Hawaii Revised Statutes, is amended to read as follows:

"§235-98 Returns; form, verification and authentication, time of filing. Returns shall be in such form as the department of taxation may prescribe from time to time and shall be verified by written declarations that the statements therein made are subject to the penalties prescribed in section 231-36. [Corporate returns shall be authenticated by the signature of the president, vice president, treasurer, assistant treasurer, chief accounting officer, or any other officer duly authorized so to act, under the penalties prescribed by section 231-36. The fact that an individual's name is signed on the corporation return shall be prima facie evidence that the individual is authorized to sign the return on behalf of the corporation.]

The department may grant a reasonable extension of time for filing returns under such rules as it shall prescribe. Except as otherwise provided by statute for cases in which exceptional circumstances require additional time, including cases of persons who are outside the United States, no extension of time for filing returns shall be for more than six months in order to expedite the timely determination of tax liability and the timely remission of taxes."

SECTION 15. Section 235-110.4, Hawaii Revised Statutes, is amended by amending subsection (a) to read as follows:

"(a) There shall be allowed to each taxpayer subject to the taxes imposed by this chapter and chapter 237D, an income tax credit, which shall be deductible from the taxpayer's net income tax liability, if any, imposed by this chapter for the taxable year in which the credit is properly claimed.

The amount of the credit shall be four per cent of the construction or renovation costs incurred during the taxable year for each qualified hotel facility located in Hawaii, and shall not include the construction or renovation costs for which another credit was claimed under this chapter for the taxable year.

In the case of a partnership[, S corporation,] estate, trust, association of apartment owners of a qualified hotel facility, time share owners association, or any developer of a time share project, the tax credit allowable is for construction or renovation costs incurred by the entity for the taxable year. The cost upon which the tax credit is computed shall be determined at the entity level. Distribution and share of credit shall be determined pursuant to section 235-110.7(a).

If a deduction is taken under section 179 (with respect to election to expense depreciable business assets) of the Internal Revenue Code, no tax credit shall be allowed for that portion of the construction or renovation cost for which the deduction is taken.

The basis of eligible property for depreciation or accelerated cost recovery system purposes for state income taxes shall be reduced by the amount of credit allowable and claimed. In the alternative, the taxpayer shall treat the amount of the credit allowable and claimed as a taxable income item for the taxable year in which it is properly recognized under the method of accounting used to compute taxable income."

SECTION 16. Section 235-110.6, Hawaii Revised Statutes, is amended by amending subsection (a) to read as follows:

"(a) Each principal operator of a commercial fishing vessel who files an individual [or corporate] net income tax return for a taxable year may claim an income tax credit under this section against the Hawaii state individual [or corporate] net income tax."

SECTION 17. Section 235-110.45, Hawaii Revised Statutes, is amended to read as follows:

"(a) There shall be allowed to each taxpayer who is the owner, developer, or lessee of residential real property, subject to the taxes imposed by this chapter, a residential construction and remodeling tax credit that shall be deductible from the taxpayer's net income tax liability, if any, imposed by this chapter for the taxable year in which the credit is properly claimed. The amount of the tax credit claimed under this section by the taxpayer in all years for which the credit is available shall be limited to four per cent of the residential construction or remodeling costs incurred during the taxable year for which the credit is claimed; provided that the costs shall not exceed $250,000 in the aggregate for each residential unit; and that the costs are incurred before July 1, 2003.

In the case of a partnership, [S corporation,] estate, trust, or association of apartment owners, the tax credit allowable is for construction or remodeling costs incurred by the entity for the taxable year. The cost upon which the tax credit is computed shall be determined at the entity level. Distribution and share of credit shall be determined pursuant to section 235-110.7(a).

If a deduction is taken under section 179 (with respect to election to expense depreciable business assets) of the Internal Revenue Code, no tax credit shall be allowed for that portion of the construction or remodeling cost for which the deduction is taken.

The basis of eligible property for depreciation or accelerated cost recovery system purposes for state income taxes shall be reduced by the amount of credit allowable and claimed. In the alternative, the taxpayer shall treat the amount of the credit allowable and claimed as a taxable income item for the taxable year in which it is properly recognized under the method of accounting used to compute taxable income."

SECTION 18. Section 235-110.46, Hawaii Revised Statutes, is amended by amending subsection (b) to read as follows:

"(b) The tax credit earned shall be equal to the qualified costs incurred from June 1, 2003, through May 31, 2009, up to a maximum of $75,000,000 of credits in the aggregate for all qualified taxpayers for all years; provided that notwithstanding the amount of tax credits earned in any year, a maximum of $7,500,000 of tax credits in the aggregate for all qualified taxpayers may be used in any one taxable year. The credits over $7,500,000 shall be used as provided in subsection (d). In the case of a partnership, limited liability company, [S corporation,] estate, trust, or association of apartment owners, the tax credit allowable is for qualified costs incurred by the entity. The costs upon which the tax credit is computed shall be determined at the entity level."

SECTION 19. Section 235-110.92, Hawaii Revised Statutes, is amended by amending subsection (a) to read as follows:

"(a) There shall be allowed to each eligible taxpayer subject to the taxes imposed by this chapter, an income tax credit, which shall be deductible from the eligible taxpayer's net income tax liability, if any, imposed by this chapter for the taxable year in which the credit is properly claimed.

The amount of the credit shall be four per cent of the qualifying costs incurred and paid by the eligible taxpayer during the taxable year for each qualified water storage facility in the State, and shall not include construction or repair costs for which another credit was claimed under this chapter for the taxable year.

In the case of a partnership, [S corporation,] estate, or trust, the tax credit allowable is for qualifying costs incurred and paid by the entity for the taxable year. The cost upon which the tax credit is computed shall be determined at the entity level. Distribution and share of credit shall be determined pursuant to section 235-110.7(a).

If a deduction is taken under section 179 (with respect to election to expense depreciable business assets) of the Internal Revenue Code, no tax credit shall be allowed for that portion of the construction or repair costs for which the deduction is taken.

The basis of eligible property for depreciation or accelerated cost recovery system purposes for state income taxes shall be reduced by the amount of credit allowable and claimed. In the alternative, the taxpayer shall treat the amount of the credit allowable and claimed as taxable income for the taxable year in which it is properly recognized under the method of accounting used to compute taxable income."

SECTION 20. Section 235-111.5, Hawaii Revised Statutes, is amended by amending subsection (a) and (b) to read as follows:

"(a) A qualified high technology business as defined in section 235-7.3 may apply to the department to sell its unused net operating loss carryover to another taxpayer. If approved by the department, a qualified high technology business may sell its unused net operating loss carryover to another taxpayer in an amount equal to at least seventy-five per cent of the amount of the surrendered tax benefit, computed at the corporate rate pursuant to section 235-71; provided that the qualified high technology business may sell no more than $500,000 of its unused net operating loss carryover to another taxpayer per year. In the case of partnerships, limited liability partnerships, and limited liability companies classified as partnerships, [and S corporations,] each partner, member, or shareholder may sell its share of the entity's total net operating loss. The tax benefit purchased by the buyer shall be claimed in the year for which the sale is approved by the department. Any use of the purchased net operating loss carryover for tax carryback or carryforward purposes shall comply with applicable law. The income from the sale of the net operating loss carryover received by the seller shall be reported on its tax return in the taxable year received but shall not be considered taxable income.

(b) No application for the sale of unused net operating losses shall be approved if the seller is a qualified high technology business that:

(1) Has demonstrated positive net income in either of the two previous full years of ongoing operations as determined on its financial statements;

(2) Has demonstrated a ratio of one hundred ten per cent or greater of operating revenues divided by operating expenses in either of the two previous full years of operations as determined on its financial statements; or

(3) Is directly or indirectly at least fifty per cent owned or controlled by another corporation that has demonstrated positive net income in either of the two previous full years of ongoing operations as determined on its financial statements or is part of a consolidated group of affiliate corporations, as filed for federal income tax purposes, that in the aggregate has demonstrated positive net income in either of the two previous full years of ongoing operations as determined on its combined financial statements.

In the case of partnerships, limited liability partnerships, and limited liability companies classified as partnerships, [and S corporations,] the application for the sale of unused net operating losses shall only be approved to the extent that all partners, members, or shareholders certify that they have not received a tax benefit from the losses."

SECTION 21. Section 235D-2, Hawaii Revised Statutes, is amended by amending subsection (d) to read as follows:

"(d) In the case of a partnership,[ S corporation,] estate, or trust, the allowable tax credit is for qualified improvement costs incurred by the entity for the taxable year. The costs upon which the tax credit is computed shall be determined at the entity level. Distribution and share of the tax credit shall be determined by rules adopted pursuant to section 235D-4."

SECTION 22. Chapter 235, part IV, Hawaii Revised Statutes, is repealed.

SECTION 23. Chapter 235, part VII, Hawaii Revised Statutes, is repealed.

SECTION 24. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 25. This Act shall take effect on January 1, 2006.

INTRODUCED BY:

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