Hawaii recently became the latest state to adopt a workaround to the $10,000 state and local tax deduction limit allowable to individuals resulting from the 2017 Tax Cuts and Jobs Act. The workaround is now well known (to date, more than 30 states have enacted similar legislation) and allows a pass-through entity (PTE) to make a state-level election to pay and deduct state income taxes on behalf of its eligible owners who generally receive either a tax credit or an income subtraction.
Enacted into law on June 1, 2023, Hawaii Senate Bill 1437 takes effect starting with taxable years beginning after December 31, 2022 and allows an electing PTE to make an irrevocable annual election—binding on all of its owners—to pay income tax at the entity level. Other important considerations for making the Hawaii election are:
- The PTE tax rate will be equal to the highest rate applicable to individuals under Hawaii Revised Statute Section 235-51, currently at 11%.
- Publicly traded partnerships and C corporation owners are not allowed to participate in the PTE election.
- Guaranteed payments are eligible to be included in the taxable income calculation of a PTE making the election.
- The election will satisfy the tax return filing requirement of nonresident individuals if their distributive share of income from the PTE is their only source of Hawaii income, and their share of tax is paid by the PTE.
- Eligible owners are entitled to a nonrefundable tax credit equal to their share of the tax paid by the PTE.
- There is no carryover provision for any credit amount in excess of the owner’s liability.
- An electing PTE with an overall net loss will be allowed to carry forward that loss indefinitely until exhausted, provided the PTE continues to make the election in subsequent years.
- Hawaii residents will be entitled to a credit for PTE taxes paid to other states, provided those taxes are substantially similar to the tax imposed by Hawaii. Hawaii has yet to publish a list of “substantially similar” taxes.
Additional guidance from the Hawaii Department of Revenue as it relates to timing of the election, estimated tax payment thresholds and due dates, credit ordering rules, and forms to use has not been issued yet.
FORVIS will continue to monitor future developments related to this legislation. If you have any questions or need assistance, please reach out to a professional at FORVIS or submit the Contact Us form below.