This is an update to the Tax Insights that was issued on May 30, 2023 and July 28, 2023. On June 1, 2023, S.B. 1437, S.D. 1, H.D. 2, C.D. 1, was enacted into law as Act 50, Session Laws of Hawaii 2023. Act 50 is a state and local tax (SALT) cap workaround measure that would allow partnerships and S-corporations to elect to pay Hawaii income tax at the entity level. By electing to pay Hawaii income tax on Hawaii pass-through entity (PTE) income at the entity level, partners and S-corporation shareholders would be able to avoid the SALT cap.
Department of Taxation Guidance
On July 21, 2023, the Department of Taxation (DOTAX) issued its initial guidance in Tax Information Release (TIR) 2023-01. On October 31, 2023, DOTAX issued its final guidance in TIR 2023-03 (AMENDED). The following is a summary of the notable features, requirements, and deadlines related to Hawaii PTE income tax election:
- Electronic filing and payment required – All tax returns and required schedules must be filed electronically. Payments must be made by a DOTAX approved means of electronic funds transfer.
- Election deadline – The election must be made on or before the original due date of return or extended due date if an extension is granted. For calendar year taxpayers, this is April 20th and October 20th respectively.
- Application of election – The PTE election applies to all members, except for C-corporations. Members may not opt out of the election once it is made.
- Calculation of tax – The PTE tax is calculated by applying the 11% rate to all members’ distributive shares of income and guaranteed payments. There is no capital gains or otherwise reduced PTE tax rate and there are no exceptions for specific types of income flowing through from the PTE to its members.
- PTE tax payment deadline – The PTE tax must be paid by the original due date of the return. For calendar year taxpayers this is April 20th following the close of the taxable year. DOTAX began to accept electronic PTE tax payments on October 30, 2023.
- Estimated tax payments – Estimated tax payments have been waived for the 2023 tax year. Estimated payments made to the members’ individual accounts may not be transferred to the PTE’s account. For the 2024 and 2025 tax years, estimated payments will be required.
- Tax credit allocation schedule filing deadline – The schedule must be filed by the original due date of the return or extended due date if an extension is granted. For calendar year taxpayers, the due dates are April 20th and October 20th respectively. No amendments to the schedule will be allowed after the applicable deadline to file the schedule.
- Tax credits – Each member will receive an allocation of their portion of the PTE tax paid at the entity level in the form of a nonrefundable tax credit that may not be carried forward. Thus, if the tax credit exceeds the members tax liability for the year, the tax credit will be lost.
- Multi-tiered entities – TIR 2023-03 does not allow any exclusion for distributive shares of income or guaranteed payments received from an electing PTE. Thus, if a multi-tiered entity makes the election at more than one of its PTEs, the income that flows through may be subject to the PTE tax at more than one level.
- Refunds of PTE tax paid – If a PTE pays the tax but ultimately decides not to make the election, the PTE is eligible to claim a refund of the amount paid. An electing PTE may claim a refund for the amount of PTE taxes paid in excess of the amount claimed on the tax credit allocation schedule, provided that the claim is made before the generally applicable income tax refund statute of limitations expires.
- PTE taxes paid to another jurisdiction – Beginning with tax year 2023, members may claim a credit for PTE taxes paid to another jurisdiction on their individual returns even if it doesn’t make the PTE election for Hawaii income tax purposes.
TIR 2023-03 is attached to this Tax Insights for your convenience. Click the link below to download.
What should you do now?
Although the Hawaii PTE tax is not due until April 20th for calendar year taxpayers, you may need to pay the PTE tax before the end of the year to be able to claim a deduction for the PTE taxes paid for the 2023 tax year. Thus, the first decision that must be made is whether a deduction for the 2023 tax year is desired. If the PTE taxes are paid in 2024, a deduction for the taxes paid may not be available for 2023.
Each PTE’s tax circumstances must be analyzed to determine whether the election would be appropriate and beneficial to its members. In addition, for multi-tiered PTEs, it is critical that the entities at each tier be analyzed to determine the level at which the election should be made to maximize the benefit.
If you would like our assistance in determining whether the PTE election would benefit you, please contact us immediately.
The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice. This communication may not be applicable to your specific circumstances and may require consideration of non-tax and other tax factors if any action is to be contemplated. Please contact your tax professional prior to taking any action based on this information. Accuity LLP assumes no obligation to the reader of any changes in tax laws or other factors that could affect the information contained herein.