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On June 13, 2018, the Hawaii legislature enacted legislation updating Hawaii’s conformity date to the Internal Revenue Code (IRC) to Feb. 9, 2018, as it applies to corporate and personal income taxes for tax years beginning after 2017.1
Hawaii’s prior IRC conformity date was Dec. 31, 2016, for tax years beginning after 2016. Hawaii specifically decouples from several key IRC provisions contained in H.R.1, more commonly known as the Tax Cuts and Jobs Act (TCJA).2
Hawaii S.B. 2821
Historically, Hawaii has conformed to the IRC on an annual static basis, adopting the IRC as of a fixed date. S.B. 2821 advances the date of Hawaii’s conformity to the IRC from Dec. 31, 2016, to Feb. 9, 2018, with certain enumerated exceptions. With the passage of S.B. 2821, Hawaii explicitly will decouple from many of the federal provisions adopted under the TCJA, including:
- The suspension of miscellaneous itemized deductions and the temporary repeal of the overall limitation on itemized deductions under IRC Secs. 67(g) and 68(f);3
- The treatment of certain foreign branch losses under IRC Sec. 91;4
- The suspension of the qualified bicycle commuting reimbursements exclusion under IRC Sec. 132(f)(8);5
- Exceptions to certain nondeductible fines and penalties under Sec. 162(f)(2)-(4);6
- Limitations of itemized deductions for home mortgage interest, state and local taxes, and personal casualty losses that are not attributable to federally declared disasters under IRC Secs. 163(h)(3)(F), 164(b)(6)(B), and 165(h)(5), respectively;7
- The deduction for qualified business income from pass-through entities under IRC Sec. 199A;8
- The suspension of moving expense deductions under IRC Sec. 217(k);9
- Deductions for foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI) under IRC Sec. 250;10
- The treatment of certain related-party amounts paid or accrued in hybrid transactions or with hybrid entities under IRC Sec. 267A;11
- IRC Secs. 1400Z-1 to 1400Z-2, relating to opportunity zones.12
Further, Hawaii does not adopt the federal changes to IRC Sec. 274.13
TCJA eliminated business expense deductions for most entertainment costs and commuting benefits after 2017 as well as business expense deductions for some employer-provided meals after 2025.
As Hawaii historically has decoupled from almost all of Subchapter N of the IRC (Sections 861 to 999, dealing with tax on income from sources within or outside the United States),14
Hawaii will decouple from IRC Sections 951A and 965, which respectively contain the provisions governing the GILTI inclusion and the one-time deemed repatriation tax required under the TCJA.
Hawaii generally conforms to IRC provisions related to partnership audits. The new partnership audit rules became fully effective for federal income tax purposes on Jan. 1, 2018. The new regime’s major policy change is that partnerships must be audited and assessed at the partnership level and are responsible for payment of any additional tax due at the partnership level. The new regime includes an opt-out provision for partnerships with 100 or fewer partners. Partnerships that elect under IRC Sec. 6221(b) to opt out of the new rules for federal purposes must make the same election for state purposes. Hawaii generally adopts the definitions and special rules for partnerships in IRC Sec. 6241.15
However, the state does not adopt the IRC’s definitions of partnership, return due date, and partnerships having principal place of business outside United States.16
The Hawaii legislation also updates Hawaii’s estate and generation-skipping transfer tax laws to conform to the IRC as in effect on Dec. 31, 2017, and adds a new provision to address procedural issues surrounding these taxes, including audit powers of the Department.17
The new legislation provides taxpayers with some clarity as to which federal tax reform provisions apply for Hawaii state tax purposes. Hawaii’s conformity legislation highlights how states are selectively conforming to TCJA provisions. Careful consideration to which provisions of the TCJA will be followed, versus the provisions that will not, is understandable given the impact such choices will have on the state. Hawaii’s decision to decouple in large part from the TCJA allows for additional time to weigh the revenue impact of conformity to specific TCJA provisions. Given that many of the provisions contained in the TCJA will impact returns for the 2018 tax year or later, Hawaii has the opportunity to reconsider its conformity position during its next legislative session.
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