| 47 | | - | SECTION 1. The legislature finds that Act 50, Session Laws of Hawaii 2023 (Act 50), allows certain pass-through entities to elect to pay income taxes at the entity level. Act 50 was intended to help Hawaii's small businesses by allowing taxpayers to deduct Hawaii state and local taxes paid on their federal income tax returns. These deductions from federal taxable income were eliminated through changes to the federal tax code in 2017, which deprived Hawaii taxpayers of significant federal tax benefits. Under Act 50, the entity level tax was calculated by applying the eleven per cent rate, Hawaii's highest individual income tax rate, to the income to be distributed. The high tax rate and inability to carry the credit forward made it difficult for many small businesses to benefit from Act 50. The legislature further finds that many pass-through entity members were unable to benefit from Act 50 as intended and that Act 50 should be amended. The purpose of this Act is to reduce the pass-through entity level tax rate and allow the tax credit to be carried forward to subsequent years to allow more small businesses to benefit from the entity level tax election that Act 50 provided. SECTION 2. Section 235-51.5, Hawaii Revised Statutes, is amended as follows: 1. By amending subsection (b) to read: "(b) Notwithstanding any provision of law to the contrary, the following tax is imposed on each electing pass-through entity: the sum of all member's distributive shares and guaranteed payments of Hawaii taxable income as calculated under this chapter, multiplied by [the highest rate of tax applicable to the individual under section 235-51;] nine per cent; provided that the distributive shares and guaranteed payments of members who are corporations, partnerships, S corporations, tax-exempt entities, and other taxpayers designated by the department shall not be included in the sum and shall not be subject to the tax under this section. If the income calculated pursuant to this subsection reflects a net loss for the electing pass-through entity, the net loss may be carried forward to subsequent tax years for as long as the electing pass-through entity elects to be subject to the tax pursuant to this section until exhausted." 2. By amending subsection (e) to read: "(e) Each member of an electing pass-through entity whose distributive share or guaranteed payment of Hawaii taxable income is subject to tax under this section shall be entitled to a nonrefundable credit equal to the member's share of the tax paid pursuant to this section. If the amount of the credit authorized by this subsection exceeds the member's tax liability imposed pursuant to this chapter, [the excess amount shall not be refundable to the member.] the excess of the credit over liability may be used as a credit against the member's income tax liability in subsequent years until exhausted. Any member claiming a credit shall not be entitled to deduct from the member's Hawaii state taxable income those amounts of Hawaii state income taxes paid by the member on the member's distributive share or guaranteed payment of income from the electing pass-through entity." SECTION 3. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored. SECTION 4. This Act shall take effect on July 1, 3000, and shall apply to taxable years beginning after December 31, 2023. |
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| 47 | + | SECTION 1. The legislature finds that Act 50, Session Laws of Hawaii 2023 (Act 50), allows certain pass-through entities to elect to pay income taxes at the entity level. Act 50 was intended to help Hawaii's small businesses by allowing taxpayers to deduct Hawaii state income taxes paid on their federal income tax returns. These deductions from federal taxable income were eliminated through changes to the federal tax code in 2017, which deprived Hawaii taxpayers of significant federal tax benefits. Under Act 50, the entity level tax was calculated by applying the eleven per cent rate, Hawaii's highest individual income tax rate, to the income to be distributed. Members then receive a nonrefundable income tax credit that may not be carried forward to a subsequent year if the credit exceeds their tax liability. The high tax rate and inability to carry the credit forward made it difficult for many small businesses to benefit from Act 50. The legislature further finds that many pass-through entity members were unable to benefit from Act 50 as intended and that Act 50 should be amended. The purpose of this Act is to reduce the pass-through entity level tax rate and allow the tax credit to be carried forward to subsequent years to allow more small businesses to benefit from the entity level tax election that Act 50 provided. SECTION 2. Section 235-51.5, Hawaii Revised Statutes, is amended as follows: 1. By amending subsection (b) to read: "(b) Notwithstanding any provision of law to the contrary, the following tax is imposed on each electing pass-through entity: the sum of all member's distributive shares and guaranteed payments of Hawaii taxable income as calculated under this chapter, multiplied by [the highest rate of tax applicable to the individual under section 235-51;] nine per cent; provided that the distributive shares and guaranteed payments of members who are corporations, partnerships, S corporations, tax-exempt entities, and other taxpayers designated by the department shall not be included in the sum and shall not be subject to the tax under this section. If the income calculated pursuant to this subsection reflects a net loss for the electing pass-through entity, the net loss may be carried forward to subsequent tax years for as long as the electing pass-through entity elects to be subject to the tax pursuant to this section until exhausted." 2. By amending subsection (e) to read: "(e) Each member of an electing pass-through entity whose distributive share or guaranteed payment of Hawaii taxable income is subject to tax under this section shall be entitled to a nonrefundable credit equal to the member's share of the tax paid pursuant to this section. If the amount of the credit authorized by this subsection exceeds the member's tax liability imposed pursuant to this chapter, [the excess amount shall not be refundable to the member.] the excess of the credit over liability may be used as a credit against the member's income tax liability in subsequent years until exhausted. Any member claiming a credit shall not be entitled to deduct from the member's Hawaii state taxable income those amounts of Hawaii state income taxes paid by the member on the member's distributive share or guaranteed payment of income from the electing pass-through entity." SECTION 3. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored. SECTION 4. This Act, upon its approval, shall apply to taxable years beginning after December 31, 2023. INTRODUCED BY: _____________________________ |
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