HRS § 235-51.5 — Pass-through entity taxation election


HRS
§235-51.5 Pass-through entity taxation
election. (a) A partnership or S corporation may elect to be taxed
pursuant to this section as an electing pass-through entity in any tax 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 such authorization
under penalty of perjury;
provided that once the election is made, it shall be
irrevocable for that taxable year and shall be binding on all partners,
shareholders, and members of the electing pass-through entity.
(b) Notwithstanding any provision of law to
the contrary, the following tax is imposed on each electing pass-through
entity: the sum of all qualified member's distributive shares and guaranteed
payments of Hawaii taxable income as calculated under this chapter, multiplied
by nine per cent. 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 tax 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
qualified member of an electing pass-through entity shall not be required to
file an income tax return pursuant to this chapter for a tax 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 qualified members, for each tax year, the member's pro
rata share of the tax imposed pursuant to this section.
(e) Each qualified member of an electing
pass-through entity whose distributive share or guaranteed payment of Hawaii
taxable income is subject to tax under this section shall be entitled to a
credit equal to the qualified member's share
of the tax paid pursuant to this section. If the amount of the credit
authorized by this subsection exceeds the qualified member's tax liability
imposed pursuant to this chapter, the excess of the credit over liability may
be used as a credit against the member's net income tax liability in subsequent
years until exhausted. Any qualified 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 qualified member's
distributive share or guaranteed payment of income from the electing
pass-through entity. Any qualified member claiming a credit shall add to the
qualified member's taxable income the qualified member's share of taxes paid by
an electing pass-through entity under this section.
(f) Each qualified member 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 qualified 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 qualified member's tax liability for
the tax imposed pursuant to this chapter, the excess amount shall not be
refundable and shall not carry forward.
(g) The department of taxation may establish
rules, pursuant to chapter 91, to implement this section.
(h) For purposes of this section:
"Electing pass-through entity" means
any eligible partnership or S corporation that elects to be subject to tax
pursuant to subsection (a).
"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.
"Qualified member" means a member of
an electing pass-through entity that is an individual, trust, or estate.
"S corporation" means a corporation
for which a valid election under section 1362(a) of the Internal Revenue Code
is in effect.