Background
This is an update to the Tax Insights that were issued on May 30, 2023, July 28, 2023, and November 3, 2023.
On June 1, 2023, Act 50, Session Laws of Hawaii 2023 became law and adopted a state and local tax (SALT) cap workaround measure that would allow partnerships and S-corporations to elect to pay Hawaii income tax at the entity level. By electing to pay Hawaii income tax on Hawaii pass-through entity (PTE) income at the entity level, partners and S-corporation shareholders would be able to avoid the SALT cap. Act 50 was ultimately codified as Hawaii Revised Statutes §235-51.5 (Hawaii PTE tax law).
2024 Amendments to the Hawaii PTE Tax Law
On June 19, 2024, Act 50, Session Laws of Hawaii 2024, was enacted amending the Hawaii PTE tax law. These changes apply starting with the current 2024 tax year and were intended to allow more taxpayers to benefit from making the election at the PTE level. The Hawaii PTE tax law was amended as follows:
- The PTE tax rate was reduced to 9% from 11%;
- A new definition of “qualified member” limits participation in the PTE election to individuals, trusts, and estates; and
- Allows the unused portion of the tax credit that flows through to a qualified member to be carried forward to subsequent tax years until exhausted.
Under the original Hawaii PTE tax law, the 11% tax rate and the inability to carry the unused portion of the tax credit forward made it very difficult for many taxpayers to benefit from making the election. In addition, by limiting participation in the election to individuals, trusts, and estates, the taxpayers who are subject to SALT cap can benefit from making the election without the unintended consequences that resulted from the original law, such as the duplicative PTE tax imposition on multi-tiered PTEs.
Department of Taxation Guidance
As of the date of this Tax Insights, the Department of Taxation (DOTAX) has not issued any guidance on the 2024 amendments to the Hawaii PTE tax law described above. However, the administrative guidelines and rules discussed in Tax Information Release 2023-03 (AMENDED) (TIR 2023-03) will likely continue to apply as the changes in law did not affect those provisions.
In TIR 2023-03, the Department specified that it would require estimated tax payments for the 2024 and 2025 tax years from PTEs that intend on making the election. For calendar year taxpayers, the deadline for the first two quarterly estimated tax payments has passed. Thus, PTEs that are intending on making the election for tax year 2024 should consider whether making estimated tax payments is appropriate if they have not already done so.
What should you do now?
In TIR 2023-03, DOTAX specified that it would require estimated tax payments for the 2024 and 2025 tax years from PTEs that intend on making the election. For calendar year taxpayers, the deadline for the first two 2024 quarterly estimated tax payments have passed. Thus, PTEs that are intending on making the election for tax year 2024 may consider whether estimated tax payments should be made if they have not already done so.
If you would like our assistance in determining whether the PTE election would benefit you, please contact us immediately.
The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice. This communication may not be applicable to your specific circumstances and may require consideration of non-tax and other tax factors if any action is to be contemplated. Please contact your tax professional prior to taking any action based on this information. Accuity assumes no obligation to the reader of any changes in tax laws or other factors that could affect the information contained herein.