HAR § 18-235-110.7-02 — Allowance of the credit

(a) In general. There shall be allowed to each taxpayer subject to the tax imposed by chapter 235, HRS, a credit which shall be deductible from the taxpayer’s net income tax liability, if any, for the taxable year in which the credit is properly claimed, if the following conditions are met: (1) The taxpayer purchases or imports eligible property; (2) The purchase or import of eligible property results in a transaction which is subject to the imposition and payment of tax at the rate of four per cent under chapters 237 or 238, HRS; (3) The eligible property is used by the taxpayer in a trade or business; (4) The eligible property is placed in service within Hawaii after December 31, 1987 (for property acquired during the period beginning January 1, 1988, to December 31, 1988, see section 18-235-110.7-09); and (5) The taxpayer files a claim for the credit on or before the end of the twelfth month following the close of the taxable year for which the credit may be claimed, or if an extension of time for filing a return has been granted, within the extension period. (b) Taxable year in which the credit is allowable. The credit shall be allowed only for the first taxable year in which the property is placed in service by the taxpayer. (1) If a taxpayer places property in service in a taxable year and the property does not qualify as eligible property (or only a portion of the property qualifies as eligible property) in that year, HRS §235-110.7 HRS §235-110.7 §18-235-110.7-03 no credit (or a credit only as to the portion which qualifies in that year) shall be allowed to the taxpayer with respect to the property. This is the rule notwithstanding that the property (or a greater portion of the property) qualifies as eligible property in a subsequent taxable year. (2) Example. Paragraph (1) is illustrated as follows: In 1988, a taxpayer places property in service and uses the property entirely for personal purposes. In 1989, the taxpayer begins using the property in a trade or business. In this case, no credit is allowable to the taxpayer, with respect to the property, for either 1988 or 1989. (3) Constructed, reconstructed, or erected property which is placed in service over a span of more than one taxable year, see section 18-235-110.7-11. (c) Taxpayer who is eligible for the credit in lease or sale-leaseback transactions. (1) In general. The determination of the taxpayer who is entitled to the credit when the parties characterize a transaction as a lease or sale-leaseback (as defined in section 18-235-110.7- 01) requires an analysis of whether the transaction is, in fact, a lease or sale-leaseback for federal income tax purposes. The characterization of a transaction as a lease or sale- leaseback determines who is the economic owner of the property and thereby entitled to the tax benefits (i.e., credit) associated with the property. Only one party, the economic owner of the property, is entitled to claim any available credit. (2) Lease. If a transaction is a lease for federal income tax purposes, the lessor entering into a lease agreement with respect to property which is eligible for the credit is treated as the owner of the property. The lessor may thereby claim any available credit. (3) Sale-leaseback. If a transaction is a sale-leaseback for federal income tax purposes, the buyer/lessor entering into a sale-leaseback arrangement with respect to property which is eligible for the credit is treated as the owner of the property. The buyer/lessor may thereby claim any available credit. (4) Sale. If the parties characterize a transaction as a lease, but it is in reality a sale for federal income tax purposes, the lessee is the owner of the property. Assuming that the property is eligible for the credit, the lessee may thereby claim any available credit. Note that for purposes of this paragraph, the term “lessee” is used for convenience, without intending to suggest the propriety of the parties’ characterization of the transaction as a lease. (d) Solar and wind energy property. If a taxpayer is eligible for both the income tax credit under section 235-12, HRS (regarding solar or wind energy devices), and the capital goods excise tax credit for a particular solar or wind energy property, the credit under section 235-12, HRS, shall be deducted from the taxpayer’s net income tax liability before the capital goods excise tax credit.