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.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                        
THE SENATE                              S.B. NO.           2512
TWENTIETH LEGISLATURE, 2000                                
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 resulted in an unfair and
 
 6 disproportionate tax increase for the restaurant and
 
 7 entertainment industries and the business customers they serve
 
 8 thereby limiting business activity and spending particularly
 
 9 among the small business community.
 
10      Hawaii Congressman Neil Abercrombie is sponsoring
 
11 legislation in Washington D.C. to increase or restore tax
 
12 deductions for business meals and entertainment, spousal business
 
13 travel, and business entertainment for performing arts events.
 
14 Congressman Abercrombie feels these measures will help the
 
15 travel, tourism, and entertainment industries.  In effect, making
 
16 Hawaii more attractive for business travelers will create jobs,
 
17 boost visitor count, and strengthen the economy.
 
18      The legislature finds that allowing the full deduction for
 
19 business meals and entertainment expenses will help to stimulate
 

 
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 1 the State's economy.  The increased patronage of food and
 
 2 beverage establishments and the additional business for other
 
 3 industries will contribute to a faster recovery.
 
 4      The purpose of this Act is to provide the full deduction for
 
 5 business meals and entertainment expenses and to allow a
 
 6 deduction for club dues as a business expense. 
 
 7      SECTION 2.  Section 235-2.4, Hawaii Revised Statutes, is
 
 8 amended to read as follows:
 
 9      "§235-2.4  Operation of certain Internal Revenue Code
 
10 provisions.(a)  Section 63 (with respect to taxable income
 
11 defined) of the Internal Revenue Code shall be operative for the
 
12 purposes of this chapter, except that the standard deduction
 
13 amount in section 63(c) of the Internal Revenue Code shall
 
14 instead mean:
 
15      (1)  $1,900 in the case of:
 
16           (A)  A joint return as provided by section 235-93; or
 
17           (B)  A surviving spouse (as defined in section 2(a) of
 
18                the Internal Revenue Code);
 
19      (2)  $1,650 in the case of a head of household (as defined
 
20           in section 2(b) of the Internal Revenue Code);
 
21      (3)  $1,500 in the case of an individual who is not married
 
22           and who is not a surviving spouse or head of household;
 
23           or
 

 
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 1      (4)  $950 in the case of a married individual filing a
 
 2           separate return. 
 
 3      Section 63(c)(4) shall not be operative in this State.
 
 4 Section 63(c)(5) shall be operative, except that the limitation
 
 5 on basic standard deduction in the case of certain dependents
 
 6 shall be the greater of $500 or such individual's earned income.
 
 7 Section 63(f) shall not be operative in this State.
 
 8      The standard deduction amount for nonresidents shall be
 
 9 calculated pursuant to section 235-5.
 
10      (b)  Section 72 (with respect to annuities; certain proceeds
 
11 of endowment and life insurance contracts) of the Internal
 
12 Revenue Code shall be operative for purposes of this chapter and
 
13 be interpreted with due regard to section 235-7(a), except that
 
14 the ten per cent additional tax on early distributions from
 
15 retirement plans in section 72(t) shall not be operative for
 
16 purposes of this chapter.
 
17      (c)  Section 121 (with respect to exclusion of gain from
 
18 sale of principal residence) of the Internal Revenue Code shall
 
19 be operative for purposes of this chapter, except that for the
 
20 election under section 121(f), a reference to section 1034
 
21 treatment means a reference to section 235-2.4(n) in effect for
 
22 taxable year 1997.
 
23      (d)  Section 219 (with respect to retirement savings) of the
 

 
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 1 Internal Revenue Code shall be operative for the purpose of this
 
 2 chapter.  For the purpose of computing the limitation on the
 
 3 deduction for active participants in certain pension plans for
 
 4 state income tax purposes, adjusted gross income as used in
 
 5 section 219 as operative for this chapter means federal adjusted
 
 6 gross income.
 
 7      (e)  Section 220 (with respect to medical savings accounts)
 
 8 of the Internal Revenue Code shall be operative for the purpose
 
 9 of this chapter, but only with respect to medical services
 
10 accounts that have been approved by the Secretary of the Treasury
 
11 of the United States.
 
12      (f)  Section 274 (with respect to disallowance of certain
 
13 entertainment expenses) of the Internal Revenue Code shall be
 
14 operative for the purposes of this chapter except:
 
15      (1)  Subsection (a)(3) shall not be operative and a
 
16           deduction for club dues shall be allowed; and
 
17      (2)  Subsection (n) shall be operative but the allowable
 
18           percentage of meal and entertainment expenses shall be
 
19           one hundred per cent deductible for purposes of this
 
20           chapter.
 
21      [(f)] (g)  Section 408A (with respect to Roth Individual
 
22 Retirement Accounts) of the Internal Revenue Code shall be
 
23 operative for the purposes of this chapter.  For the purposes of
 

 
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 1 determining the aggregate amount of contributions to a Roth
 
 2 Individual Retirement Account or qualified rollover contribution
 
 3 to a Roth Individual Retirement Account from an individual
 
 4 retirement plan other than a Roth Individual Retirement Account,
 
 5 adjusted gross income as used in section 408A as operative for
 
 6 this chapter means federal adjusted gross income.
 
 7      [(g)] (h)  In administering the provisions of sections 410
 
 8 to 417 (with respect to special rules relating to pensions,
 
 9 profit sharing, stock bonus plans, etc.), sections 418 to 418E
 
10 (with respect to special rules for multiemployer plans), and
 
11 sections 419 and 419A (with respect to treatment of welfare
 
12 benefit funds) of the Internal Revenue Code, the department of
 
13 taxation shall adopt rules under chapter 91 relating to the
 
14 specific requirements under such sections and to such other
 
15 administrative requirements under those sections as may be
 
16 necessary for the efficient administration of sections 410 to
 
17 419A.
 
18      In administering sections 401 to 419A (with respect to
 
19 deferred compensation) of the Internal Revenue Code, Public Law
 
20 93-406, section 1017(i), shall be operative for the purposes of
 
21 this chapter.
 
22      In administering section 402 (with respect to the taxability
 
23 of beneficiary of employees' trust) of the Internal Revenue Code,
 

 
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                                     S.B. NO.           2512
                                                        
                                                        

 
 1 the tax imposed on lump sum distributions by section 402(e) of
 
 2 the Internal Revenue Code shall be operative for the purposes of
 
 3 this chapter and the tax imposed therein is hereby imposed by
 
 4 this chapter at the rate determined under this chapter.
 
 5      [(h)] (i)  Section 468B (with respect to special rules for
 
 6 designated settlement funds) of the Internal Revenue Code shall
 
 7 be operative for the purposes of this chapter and the tax imposed
 
 8 therein is hereby imposed by this chapter at a rate equal to the
 
 9 maximum rate in effect for the taxable year imposed on estates
 
10 and trusts under section 235-51.
 
11      [(i)] (j)  Section 469 (with respect to passive activities
 
12 and credits limited) of the Internal Revenue Code shall be
 
13 operative for the purposes of this chapter.  For the purpose of
 
14 computing the offset for rental real estate activities for state
 
15 income tax purposes, adjusted gross income as used in section 469
 
16 as operative for this chapter means federal adjusted gross
 
17 income.
 
18      [(j)] (k)  Sections 512 to 514 (with respect to taxation of
 
19 business income of certain exempt organizations) of the Internal
 
20 Revenue Code shall be operative for the purposes of this chapter
 
21 as provided in this subsection.
 
22      "Unrelated business taxable income" means the same as in the
 
23 Internal Revenue Code, except that in the computation thereof
 

 
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                                     S.B. NO.           2512
                                                        
                                                        

 
 1 sections 235-3 to 235-5, and 235-7 (except subsection (c)), shall
 
 2 apply, and in the determination of the net operating loss
 
 3 deduction there shall not be taken into account any amount of
 
 4 income or deduction which is excluded in computing the unrelated
 
 5 business taxable income.  Unrelated business taxable income shall
 
 6 not include any income from a prepaid legal service plan.
 
 7      For a person described in section 401 or 501 of the Internal
 
 8 Revenue Code, as modified by section 235-2.3, the tax imposed by
 
 9 section 235-51 or 235-71 shall be imposed upon the person's
 
10 unrelated business taxable income.
 
11      [(k)] (l)  Section 521 (with respect to cooperatives) and
 
12 subchapter T (sections 1381 to 1388, with respect to cooperatives
 
13 and their patrons) of the Internal Revenue Code shall be
 
14 operative for the purposes of this chapter as to any cooperative
 
15 fully meeting the requirements of section 421-23, except that
 
16 Internal Revenue Code section 521 cooperatives need not be
 
17 organized in Hawaii.
 
18      [(l)] (m)  Sections 527 (with respect to political
 
19 organizations) and 528 (with respect to certain homeowners
 
20 associations) of the Internal Revenue Code shall be operative for
 
21 the purposes of this chapter and the taxes imposed in each such
 
22 section are hereby imposed by this chapter at the rates
 
23 determined under section 235-71.
 

 
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                                     S.B. NO.           2512
                                                        
                                                        

 
 1      [(m)] (n)  Section 530 (with respect to education individual
 
 2 retirement accounts) of the Internal Revenue Code shall be
 
 3 operative for the purposes of this chapter.  For the purpose of
 
 4 determining the maximum amount that a contributor could make to
 
 5 an education individual retirement account for state income tax
 
 6 purposes, modified adjusted gross income as used in section 530
 
 7 for this chapter means federal modified adjusted gross income as
 
 8 defined in section 530.
 
 9      [(n)] (o)  Section 641 (with respect to imposition of tax)
 
10 of the Internal Revenue Code shall be operative for the purposes
 
11 of this chapter subject to the following:
 
12      (1)  The deduction for exemptions shall be allowed as
 
13           provided in section 235-54(b).
 
14      (2)  The deduction for contributions and gifts in
 
15           determining taxable income shall be limited to the
 
16           amount allowed in the case of an individual, unless the
 
17           contributions and gifts are to be used exclusively in
 
18           the State.
 
19      (3)  The tax imposed by section 1(e) of the Internal Revenue
 
20           Code as applied by section 641 of the Internal Revenue
 
21           Code is hereby imposed by this chapter at the rate and
 
22           amount as determined under section 235-51 on estates
 
23           and trusts.
 

 
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 1      [(o)] (p)  Section 667 (with respect to treatment of amounts
 
 2 deemed distributed by trusts in preceding years) of the Internal
 
 3 Revenue Code shall be operative for the purposes of this chapter
 
 4 and the tax imposed therein is hereby imposed by this chapter at
 
 5 the rate determined under this chapter; except that the reference
 
 6 to tax-exempt interest to which section 103 of the Internal
 
 7 Revenue Code applies in section 667(a) of the Internal Revenue
 
 8 Code shall instead be a reference to tax-exempt interest to which
 
 9 section 235-7(b) applies.
 
10      [(p)] (q)  Section 685 (with respect to treatment of
 
11 qualified funeral trusts) of the Internal Revenue Code shall be
 
12 operative for purposes of this chapter, except that the tax
 
13 imposed under this chapter shall be computed at the tax rates
 
14 provided under section 235-51, and no deduction for the exemption
 
15 amount provided in section 235-54(b) shall be allowed.  The cost-
 
16 of-living adjustment determined under section 1(f)(3) of the
 
17 Internal Revenue Code shall be operative for the purpose of
 
18 applying section 685(c)(3) under this chapter.
 
19      [(q)] (r)  Section 1212 (with respect to capital loss
 
20 carrybacks and carryforwards) of the Internal Revenue Code shall
 
21 be operative for the purposes of this chapter; except that for
 
22 the purposes of this chapter the capital loss carryback
 
23 provisions of section 1212 shall not be operative and the capital
 

 
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                                     S.B. NO.           2512
                                                        
                                                        

 
 1 loss carryforward allowed by section 1212(a) shall be limited to
 
 2 five years.
 
 3      [(r)] (s)  Subchapter S (sections 1361 to 1379) (with
 
 4 respect to tax treatment of S corporations and their
 
 5 shareholders) of chapter 1 of the Internal Revenue Code shall be
 
 6 operative for the purposes of this chapter as provided in part
 
 7 VII.
 
 8      [(s)] (t)  Section 6015 (with respect to relief from joint
 
 9 and several liability on joint return) of the Internal Revenue
 
10 Code is operative for purposes of this chapter.
 
11      [(t)] (u)  Subchapter C (sections 6221 to 6233) (with
 
12 respect to tax treatment of partnership items) of chapter 63 of
 
13 the Internal Revenue Code shall be operative for the purposes of
 
14 this chapter.
 
15      [(u)] (v)  Subchapter D (sections 6240 to 6255) (with
 
16 respect to simplified audit procedures for electing large
 
17 partnerships) of the Internal Revenue Code shall be operative for
 
18 the purposes of this chapter, with due regard to chapter 232
 
19 relating to tax appeals.
 
20      [(v)] (w)  Section 6511(h) (with respect to running of
 
21 periods of limitation suspended while taxpayer is unable to
 
22 manage financial affairs due to disability) of the Internal
 
23 Revenue Code shall be operative for purposes of this chapter,
 

 
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                                     S.B. NO.           2512
                                                        
                                                        

 
 1 with due regard to section 235-111 relating to the limitation
 
 2 period for assessment, levy, collection, or credit.
 
 3      [(w)] (x)  Section 7518 (with respect to capital
 
 4 construction fund for commercial fishers) of the Internal Revenue
 
 5 Code shall be operative for the purposes of this chapter.
 
 6 Qualified withdrawals for the acquisition, construction, or
 
 7 reconstruction of any qualified asset which is attributable to
 
 8 deposits made before the effective date of this section shall not
 
 9 reduce the basis of the asset when withdrawn.  Qualified
 
10 withdrawals shall be treated on a first-in-first-out basis."
 
11      SECTION 3.  Statutory material to be repealed is bracketed.
 
12 New statutory material is underscored.
 
13      SECTION 4.  This Act, upon its approval, shall apply to
 
14 taxable years beginning after December 31, 1999.
 
15 
 
16                           INTRODUCED BY:  _______________________