HAR § 18-237-16.5-04 — Allocation — sublease of less than one hundred per cent of the real property or space

(a) If the Lessee subleases less than one hundred per cent of the real property or space that was leased from the Lessor, the Lessee shall allocate the total amount of gross proceeds or gross income paid by the Lessee for that real property or space based upon the percentage of real property or space subleased, or the fair rental value as determined by the factors in section 18-237-16.5-06. The director of taxation may redetermine the amount of the Lessee’s deduction under section 237-16.5(d), HRS, if the director finds that the basis for the allocation is not reasonable or that redetermination is necessary to prevent the avoidance of taxes. The total amount allocated by the Lessee to all subleases shall not exceed the total amount of gross proceeds paid by the Lessee to the Lessor. (b) The Lessee’s allocation may be based upon the percentage of the real property or space subleased by the Lessee when it is reasonable under the circumstances. (1) The percentage of real property or space subleased by the Lessee shall be multiplied by the amount of gross proceeds or gross income paid by the Lessee to the Lessor for the real property or space. (2) The product of the preceding multiplication shall be deducted by the Lessee from the amount of gross proceeds or gross income received for subleasing the real property or space. Example 7: Lessor L leases real property XYZ, which is divided into spaces X, Y , and Z, to lessee A for $20,000 (space X at $10,000 + space Y at $5,000 + space Z at $5,000). Lessee A subleases less than one hundred percent of Spaces X (50 per cent) and Y (40 per cent). If reasonable under the circumstances, Lessee A may allocate the $20,000 paid to Lessor L and compute its tax in the following manner. Space X Step (1) A subleases fifty per cent of Space X for $7,000. The percentage of Space X subleased (50 per cent) multiplied by the amount of rent paid by A to L for Space X ($10,000) is $5,000. Step (2) Assuming a maximum allowable rate of 0.875, A’s deduction would be $4,375 ($5,000 x 87.5 per cent). A would be subject to a general excise tax of $105 (($7,000 - $4,375) x 4 per cent tax rate) on the income from subleasing fifty per cent of Space X. Space Y Step (1) A subleases forty per cent of Space Y for $3,000. The percentage of Space Y subleased (40 per cent) multiplied by the amount of rent paid by A to L for Space Y ($5,000) is $2,000. Step (2) Assuming a maximum allowable rate of 0.875, A’s deduction would be $1,750 ($2,000 x 87.5 per cent). A would be subject to a general excise tax of $50 (($3,000 - $1,750) x 4 per cent tax rate) on the income received from subleasing forty per cent of Space Y . L would be subject to a general excise tax of $800 ($20,000 x 4 per cent tax rate). (c) The Lessee’s allocation shall be based upon fair rental value as determined by the factors in section 237-16.5-06 if an allocation based upon the percentage of the real property or space subleased is not reasonable under the circumstances. (1) A ratio whose numerator is the fair rental value of the real property or space subleased by the Lessee and whose denominator is the fair rental value of all the real property or space leased by the Lessee shall be multiplied by the amount of gross proceeds or gross income paid by the Lessee to the Lessor for the real property or space. (2) The product of the preceding multiplication shall be deducted by the Lessee from the amount of gross proceeds or gross income received for subleasing the real property or space. Example 8: Lessor L leases real property Y to lessee A for $5,000 a month. Y consists of ground floor retail real property (which has a fair rental value of $7,500) and upper floor office real property (which has a fair rental value of $2,500) equal in size to the ground floor retail real property. Lessee A subleases only the upper floor office real property to sublessee B for $2,500 a month. Step (1) The property subleased represents twenty five per cent of the fair rental value of real property Y ($2,500 divided by ($2,500 + $7,500)). A’s deduction is $1,250 (25 per cent multiplied by $5,000 (the gross income paid to L for real property Y)). Step (2) Assuming a maximum allowable rate of 0.875, A’s deduction would be $1,093.75 ($1,250 x 87.5 per cent). A would be subject to a general excise tax of $56.25 (($2,500 - $1,093.75) x 4 per cent tax rate). HRS §237-16.5