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Act 221 QHTB Tax Incentives
as revised Act 215 (2004)*
100% Investment Credit 2
Stock/Equity Option income excluded from income tax for
employees, officers, directors
*
20% R&D Credit
• Refundable
• No base limitation
QHTB1
Revenues $$
Royalty & license fees
excluded from income tax
1QHTB
= > 50% devoted to Qualified
Research (QR) & > 75% QR in Hawaii:
- R&D
- Software development
- Biotechnology
- Performing arts products
- Sensors and optics
- Ocean sciences
- Astronomy
- Non-fossil fuel energy-related
technology
*
84601.6 Rev. 2008
2100%
Investment Credit:
QHTB must be Hawaii-based (property,
capital or property in Hawaii) and:
• more than 75% of QR in Hawaii; or
• more than 75% of gross income derived
from QR on sales from and mfr. in
Hawaii
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Allocate ITC to provide multiple credits
Hawaii taxaverse partners
Tax-indifferent
partners*
$1M
$1M
Allocate full
$2M ITC**
Special Purpose
Partnership or LLC
$2M
*Usually obtains more
equity interest in
partnership or LLC to
compensate for giving
up credits
84601.6 Rev. 2008
HAWAII
QHTB
**Allocation allowed
by statute: HRS
Section 235-2.45(d)
Limitations: see slide 11
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Non-QHTB Tax Incentives
Enterprise Zones
• Income tax holiday
• GET holiday
• Property tax
holiday
•UI holiday
Movie Production
Credit
Foreign Trade
Zone
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4% Hi-tech
Renovation Credit
(added 2001)
General Excise
Tax Exemptions
•Exports
•Scientific contracts
•hi-speed telecom
• security
• environmental
• electrical power
• Capital goods
excise tax credit—
4% taken off
income tax
Renewable
Energy Tax
Credit
•Pyramiding relief
phased in
•Related Party
Exemptions
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Hawaii High Technology
Initiatives (Act 221)
•
In order to encourage the growth of high technology businesses in Hawaii, the
legislature has provided a number of tax incentives for qualified high
technology businesses (QHTBs):
– 100% high technology investment tax credit for investors
(ITCs)
– Refundable 20% tax credit for research expenditures (R&D
credit) [Act 215]
– Income tax exclusion for (a) royalties and (b) stock-related
transactions
– Increase capital loss carryforward period
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Qualified High Technology
Business (QHTB)
• Definition:
– A business, employing or owning capital or property, or
maintaining an office, in Hawaii provided that:
• > 50% of its total business is in qualified research and > 75%
of its qualified research is performed in Hawaii (Activity test)
or
• > 75% of its gross income is derived from qualified research
and the income is received from (1) products sold from,
manufactured in, or produced in Hawaii or (2) services
performed in Hawaii (Income test)
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QHTB
• “Qualified research”
– Research and development under Internal Revenue Code
Section 41
– Computer software development for sale or license
– Biotechnology
– Performing arts products
– Sensors and optics
– Ocean sciences
– Astronomy
– Non-fossil fuel energy-related technology
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QHTB (con’t.)
• Businesses should obtain a QHTB comfort
ruling from the State of Hawaii Department
of Taxation to ensure that they qualify as a
QHTB
– Form A-9 (Request for a High Tech Comfort Ruling)
– See Hawaii Tax Department’s website
(http://hawaii.gov/tax/)
– Fee: $1,000
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QHTB (con’t.)
• Annual information return filing requirement
– Form N-317 (Statement by a Qualified High Technology Business)
• Tax year 2006 and prior years
– Paper form due on April 20 following the tax year
• Tax year 2007 and forward (Act 206)
–
–
–
–
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Online form on the Hawaii Tax Department’s website
Due before June 30 following the tax year
$1,000 per month penalty for failure to file ($6,000 max)
Effective: July 1, 2007 (applies to investments received
after June 30, 2007)
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High technology business
investment tax credit (ITC)
• Tax incentive for investors in a QHTB
• Nonrefundable 100% income tax credit on
investments made into a QHTB
• Limited to $2 million per QHTB per year
• Claimed over a five year period
–
–
–
–
–
First year - 35% (up to $700,000)
Second year - 25% (up to $500,000)
Third year - 20% (up to $400,000)
Fourth year - 10% (up to $200,000)
Fifth year - 10% (up to $200,000)
• Effective 2001 - 2010
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Filing requirements to claim ITC
[Act 215]
• Three step process:
– Taxpayer files for certification
• Form N-318A (Statement of Investment in a Qualified High Technology Business)
• Due March 30 following the tax year
• Fee:
– Filed by investor ($100 early filing; $150 regular filing)
– Filed by QHTB on investors’ behalf ($750 early filing; $1,000 regular
filing)
– Tax Department sends “approval” to taxpayer
• Form N-318A page 2
– Taxpayer attaches “approval” to tax return (claim) with
Form N-318 (High Technology Business Investment Tax Credit)
• The claim for the ITC must be made within 12 months
following the close of the tax year
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Limitation on allocating ITC to provide
multiple credits [TIR 2007-02]
• For each dollar invested, if the ITC allocation ratio
to an investor
Is
Then
<1.5
Hawaii tax department will not challenge because of safe
harbor
Hawaii tax department may challenge for economic substance
or business purpose
- Safe harbor available if satisfies both tests: (1)
no frontloading of credits test and (2) limited
equity shifting test
Taxpayers are required to substantiate by proving economic
substance and business purpose
1.5 - 2
>2
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Tax credit for research activities
(R&D credit)
• Tax incentive available to QHTBs
• Refundable 20% tax credit on qualified
research expenditures
– Standard to qualify is the same as federal R&D
credit except:
• No base amount limitation so credit applies to all qualified
research expenditures, not just on the amount of increase
• Research must be performed in Hawaii
• Effective 2001 - 2010
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R&D Credit
• Qualified research expenses are limited to
expenditures for:
– Employee wages (Hawaii W-2)
– Supplies (nondepreciable tangible personal
property consumed in Hawaii)
– Contract research (services performed in
Hawaii by 3rd parties)
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Filing requirements for claiming
the R&D credit [Act 215]
• Three step process:
– Taxpayer files for certification
• Form N-319A (Statement of Research and Development Costs)
• Due March 30 following the tax year
• Fee: ($400 early filing; $750 regular filing)
– Tax Department sends “approval” to taxpayer
• Form N-319A page 2
– Taxpayer attaches “approval” to tax return (claim) with
Form N-319 (Credit for Research Activities)
• The claim for the R&D credit must be made within 12
months following the close of the tax year
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Changes to R&D credit
• With the enactment of Act 215, some changes were made:
– Change in the definition of computer software
development
• Taxpayers must now intend to ultimately sell, license, or otherwise
market the software for economic consideration
• Taxpayers must have substantial rights to the intellectual property
– Elimination of the liberal construction language
• [Old language] It is the intention of the legislature that the amendments in this
Act be liberally construed.
• [New language] It is the intention of the legislature that the amendments in
this Act be construed in a manner consistent with the intent of this Act.
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QHTB stock rights income tax
exclusion
• Tax incentive for investors of QHTBs
• Income tax exemption available for
– Income earned and proceeds derived from QHTB stock
options or stock; and
– Income earned from stock of parent company of
QHTB. The parent company must possess 80% of the
total voting power of the stock or other interest in the
QHTB, and 80% of its total value.
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QHTB royalty income tax
exclusion
• Tax incentive available to QHTBs
• Income tax exclusion available for royalties
earned on intellectual property developed
and owned by the QHTB
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Other QHTB incentives
• Capital loss carryovers
– Instead of 5 years, QHTBs may carry forward capital
losses for 15 years
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Summary of QHTB
formation/operation
• Initial steps
– Form QHTB and related entities
– Obtain QHTB comfort ruling from Hawaii Tax
Department
• Operations
– Investor invests money into special purpose entity or
QHTB to generate ITC
– QHTB conducts operations to generate R&D credit, if
applicable, and other tax credits
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Non-QHTB Incentives
• Income tax (note: multiple credits may not be
claimed on the same expenditures)
– Renewable energy technologies income tax
credit
– Technology infrastructure renovation income
tax credit
– Capital goods excise tax credit
• General excise tax
– Exemption for related party transactions
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Renewable energy technologies
income tax credit
• Nonrefundable income tax credit for every
renewable energy technology system
installed and placed in service in Hawaii
after June 30, 2003
– Solar thermal energy systems
– Wind-powered energy systems
– Photovoltaic energy systems
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Renewable energy technologies
income tax credit (con’t.)
• Credit amount
– Solar thermal energy system
• Single family residential property
– 35% of actual cost or $2,250, whichever is less
• Multi-family residential property
– 35% of actual cost or $350 per unit, whichever is less
• Commercial property
– 35% of actual cost or $250,000, whichever is less
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Renewable energy technologies
income tax credit (con’t.)
•
•
Wind-powered energy systems
– Single family residential property
• 20% of actual cost or $1,500, whichever is less
– Multi-family residential property
• 20% of actual cost or $200 per unit, whichever is less
– Commercial property
• 20% of actual cost or $500,000, whichever is less
Photovoltaic energy systems
– Single family residential property
• 35% of actual cost or $5,000, whichever is less
– Multi-family residential property
• 35% of actual cost or $350 per unit, whichever is less
– Commercial property
• 35% of actual cost or $500,000, whichever is less
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Renewable energy technologies
income tax credit (con’t.)
• Act 204 (SLH 2008) update
– No credit for single family residential solar
thermal energy systems for homes with a
building permit on or after January 1, 2010
– No credit for residential home developer who
installs and places into service a system in 2009
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Technology renovation
infrastructure income tax credit
• Nonrefundable 4% income tax credit for
renovation costs of commercial buildings in
Hawaii to enable
–
–
–
–
high speed telecommunication,
physical security systems,
environmental systems, and
backup and emergency electrical systems.
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Capital goods excise tax credit
• 4% refundable income tax credit for eligible
depreciable tangible personal property
placed in service and used by the taxpayer
in a trade or business
• The claim for the credit must be made
within 12 months following the close of the
tax year
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Exemption for related party
transactions
• General excise tax exemption for related
party transactions such as:
–
–
–
–
–
interest on intercompany loans,
legal and accounting services,
use of computer software or hardware,
information technology services,
database management, and
– managerial and administrative services.
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