SB1437 HD1

SECTION 1. The purpose of this Act is to establish a state tax law to permit certain entities to elect to pay Hawaii income tax at the entity level. This Act will 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. This Act will bring Hawaii into conformity with the majority of other states that already permit similar elections by so-called "pass-through entities" to pay state income taxes.

SECTION 2. Chapter 235, Hawaii Revised Statutes, is amended by adding a new section to part III to be appropriately designated and to read as follows:

"§235- Pass-through entity taxation election. (a) A partnership or S corporation may elect to become an electing pass-through entity in any taxable year; provided that a separate election shall be made for each taxable year. An election made pursuant to this subsection shall be filed in the form and manner prescribed by the director of taxation and signed by:

(1) Each member of the entity who is a member at the time the election is filed; or

(2) Any officer, manager, or member of the entity who is authorized to make the election and who attests to having that authorization under penalty of perjury.

(b) Notwithstanding any provision of law to the contrary, the following tax is imposed on each electing pass-through entity: the sum of each member's distributive share of Hawaii taxable income, as calculated under this chapter, multiplied by the highest rate of tax applicable to the individual under section 235-51.

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 taxable years for as long as the electing pass-through entity elects to be subject to the tax pursuant to this section until exhausted.

(c) A nonresident individual who is a member of an electing pass-through entity shall not be required to file an income tax return pursuant to this chapter for a taxable year if the member's only source of Hawaii income is from electing pass‑through entities and the electing pass-through entity or entities file and pay the tax due under this section.

(d) Each electing pass-through entity shall report to each of its members, for each taxable year, the member's pro rata share of the tax imposed pursuant to this section.

(e) Each member of an electing pass-through entity shall be entitled to a 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. 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 of income from the electing pass‑through entity.

(f) Each member of an electing pass-through entity that is subject to the tax imposed by this chapter as a resident or part-year resident of the State shall be entitled to a credit for the direct member's or indirect member's pro rata share of taxes paid to another state or to the District of Columbia, on income of any partnership or S corporation of which the person is a member; provided that the taxes paid to another state or to the District of Columbia result from a tax that the director of taxation determines is substantially similar to the tax imposed pursuant to this section.

Any credit shall be calculated in a form and manner prescribed by the director of taxation; provided that the calculation is consistent with the provisions of this section. If the amount of the credit authorized by this subsection exceeds the member's tax liability for the tax imposed pursuant to this chapter, the excess amount shall be refundable to the member.

(g) The department of taxation may adopt rules under chapter 91 to implement this section.

(h) For purposes of this section:

"Direct member" means a member that holds an interest directly in an electing pass-through entity.

"Electing pass-through entity" means any eligible partnership or S corporation that elects to be subject to tax pursuant to subsection (a).

"Indirect member" means a member that itself holds an interest, through a direct member or indirect member that is a partnership or S corporation, in an electing pass-through entity.

"Member" means:

(1) A shareholder of an S corporation;

(2) A partner in a general partnership, a limited partnership, or a limited liability partnership; or

(3) A member of a limited liability company that is treated as a partnership or S corporation for federal income tax purposes.

"Partnership" means the same as in the Internal Revenue Code. "Partnership" includes a limited liability company that is treated as a partnership for federal income tax purposes but does not include any publicly traded partnership within the meaning of section 7704 of the Internal Revenue Code.

"S corporation" means a corporation for which a valid election under section 1362(a) of the Internal Revenue Code is in effect."

SECTION 3. New statutory material is underscored.

SECTION 4. This Act shall take effect on June 30, 3000, and shall apply to taxable years beginning after December 31, 2022.

THE SENATE	S.B. NO.	1437
THIRTY-SECOND LEGISLATURE, 2023		S.D. 1
STATE OF HAWAII		H.D. 1