Hawaii Administrative Rules
Title 18 - DEPARTMENT OF TAXATION
Chapter 235 - INCOME TAX LAW
Subchapter 1 - GENERAL PROVISIONS
Section 18-235-2.3 - Conformance to the federal Internal Revenue Code

Universal Citation: HI Admin Rules 18-235-2.3

Current through November, 2024

(a) In general.

(1) In order to permit a proper administration of the Hawaii net income tax law which by Act 62, S.L.H. 1979, adopted by reference various provisions of the federal Internal Revenue Code, as amended as of December 31, 1979, the director of taxation finds it desirable to establish and publish income tax rules and regulations, conforming to the requirements of chapter 91, HRS. When promulgated as required by law, these rules and regulations have the force and effect of law under chapter 235, HRS, and any other chapters which contain provisions relating to chapter 235. The law and regulations must be read together, because the regulations relating to a particular section of the law do not necessarily cover every point in the section.

(2) Scope. These rules and regulations are promulgated to:
(A) Adopt the Federal Tax Regulations relating to subtitle A, Chapters 1 and 6 of the Internal Revenue Code of 1954 as amended as of December 31, 1978, set forth in this regulation.

(B) List the inoperative sections of the Internal Revenue Code. The related federal regulations to these Internal Revenue Code sections shall also be inoperative.

(C) As provided by section 235-2.3(c) to (m), HRS, certain Internal Revenue Code sections, subsections, parts of subsections, and federal Public Law that do not apply or that are otherwise limited in application also shall apply to the related federal regulations as contained in this regulation.

(3) Adoption of federal tax regulations. The regulations relating to those sections of subtitle A, Chapters 1 and 6, Internal Revenue Code of 1954, as amended as of December 31, 1978, adopted by section 235-2.3, HRS, which are contained in the Federal Tax Regulations 1979 (Title 26, Internal Revenue, 1954 Code of Federal Regulations), with amendments and adoptions to January 1, 1979, and which are not in conflict with provisions contained in chapters 235, 231, or 232, Hawaii Revised Statutes, are hereby adopted by reference and made a part of the rules and regulations of the department of taxation, as they apply to the determination of gross income, adjusted gross income, ordinary income and loss, and taxable income, except insofar as the regulations pertain to provisions of the Internal Revenue Code and federal Public Law, which pursuant to chapter 235, HRS, and this regulation, do not apply or are otherwise limited in application. Provisions in this regulation in conflict with those sections of the Internal Revenue Code, the Federal Regulations or the federal Public Law shall be limited as provided under section 235-2.3(n), HRS.

(b) Inoperative federal tax regulations. The federal regulations relating to the following Internal Revenue Code subchapters, parts of subchapters, sections, subsections, and parts of subsections shall not be operative for the purposes of HRS chapter or this regulation unless otherwise provided. (See section 235-2.3(b), HRS.)

Subchapter Section of I.R.C.
A A 1 to 58
B 78, 103, 116, 120, 122, 151, 169, 241 to 250 (except 248 and 249), 280C
C 367
E 457
F 501 to 528 (except 512 to 515)
G 531 to 565
H 581 to 596
J 642(a), (b), (d), 668
L 801 to 844
M 853
N 861 to 999
O 1055, 1057
P 1201
Q 1301 to 1351
T1381 to 1388

(c) Zero bracketing. The federal regulations relating to the determinations, provisions, and requirements to zero-bracket amounts in the amendments to the Internal Revenue Code by Public Law 95-30, sections 101 and 102 (with respect to change in tax rates and tax tables to reflect permanent increase in standard deduction and change in definition of taxable income to reflect change in tax rates and tables) shall not be operative. (See section 235-2.3(c), HRS.)

(d) Standard deduction; individuals not eligible for standard deduction and election of standard deduction. (I.R.C. Sections 141, 142, 144). As provided by section 235-2.3(d), HRS, Internal Revenue Code Sections 141, 142, and 144 shall be operative as of June 7, 1957, as amended as of that date. The federal regulations relating to these Internal Revenue Code sections shall be inoperative for this State. The standard deduction as adopted by the State allows individuals to itemize or to elect to take a 10 percent standard deduction, but not both.

(1) Standard deduction. IRC Section 141, as amended, as of June 7, 1957, provides as follows: "Sec. 141. Standard deduction. The standard deduction referred to in section 63 (b) (defining taxable income in case of individual electing standard deduction) shall be an amount equal to 10 percent of the adjusted gross income or $1,000, whichever is the lesser, except that in the case of a separate return by a married individual the standard deduction shall not exceed $500."

In the case of a joint return, there is only one adjusted gross income and only one standard deduction. The standard deduction is $1,000 or 10 percent of the combined adjusted gross income, whichever is the lesser.

Example: If a husband has an income of $15,000 and his spouse has an income of $12,000 for the taxable year for which they file a joint return, and they have no deductions allowable for the purpose of computing adjusted gross income, the adjusted gross income shown by the joint return is the combined income of $27,000, and the standard deduction is $1,000 and not $2,000.

(2) Eligibility.
(A) IRC Section 142, as amended, as of June 7, 1957, provides as follows:
" Sec. 142. Individuals not eligible for standard deduction.
(a) Husband and wife.-The standard deduction shall not be allowed to a husband or wife if the tax of the other spouse is determined under section 1 on the basis of the taxable income computed without regard to the standard deduction.

(b) Certain other taxpayers ineligible.-The standard deduction shall not be allowed in computing the taxable income of-
(1) a nonresident alien individual;

(2) a citizen of the United States entitled to the benefits of section 931 (relating to income from sources within possessions of the United States);

(3) an individual making a return under section 443(a)(1) for a period of less than 12 months on account of a change in his annual accounting method; or

(4) an estate or trust, common trust fund, or partnership."

(B) For the purpose of section 235-2.3(d), HRS, the reference in IRC Section 142(a) to section 1 shall be deemed a reference to section 235-51, HRS. In the case of husband and wife, if the tax of one spouse is determined under section 235-51, HRS, on the basis of the taxable income computed without regard to the standard deduction and, the other spouse may not elect to take the standard deduction. If each spouse files a separate Form N-12 or N-15, both must elect to take the standard deduction or both spouses are denied the standard deduction. If one spouse files Form N-12 or N-15 and does not elect to take the standard deduction, the other spouse may not elect to take the standard deduction and, accordingly, may not compute his tax under the provisions of section 235-53, HRS, or file Form N-13 as his separate return for the taxable year.

Example: If A and his wife B, both residents of Hawaii, have gross income of $16,000 and $3,500, respectively, from wages subject to withholding and A files Form N-12 (long form) and does not elect thereon to take the standard deduction, B may not file Form N-13 (short form) but must file Form N-12, taking thereon only her actual allowable deductions and not the standard deduction. In such case, however, if both elect to take the standard deduction, A must file Form N-12 (since his gross income exceeds the amount provided by section 235-53, HRS) but B may file Form N-13, or in the alternative, she may file Form N-12 and compute the tax by using the optional tax table. Under either alternative, effect is given to the standard deduction.

(3) Election.
(A) IRC Section 144, as amended, as of June 7, 1957, provides as follows:
" Sec. 144. Election of standard deduction.
(a) Method and effect of election.-
(1) If the adjusted gross income shown on the return is $5,000 or more, the standard deduction shall be allowed if the taxpayer so elects in his return, and the Secretary or his delegate shall by regulations prescribe the manner of signifying such election in the return. If the adjusted gross income shown on the return is $5,000 or more, but the correct adjusted gross income is less than $5,000, then an election by the taxpayer under the preceding sentence to take the standard deduction shall be considered as his election to pay the tax imposed by section 3 (relating to tax based on tax table); and his failure to make under the preceding sentence an election to take the standard deduction shall be considered his election not to pay the tax imposed by section 3.

(2) If the adjusted gross income shown on the return is less than $5,000, the standard deduction shall be allowed only if the taxpayer elects in the manner provided in section 4, to pay the tax imposed by section 3. If the adjusted gross income shown on the return is less than $5,000, but the correct adjusted gross income is $5,000 or more, then an election by the taxpayer to pay the tax imposed by section 3 shall be considered as his election to take the standard deduction; and his failure to elect to pay the tax imposed by section 3 shall be considered his election not to take the standard deduction.

(3) If the taxpayer on making his return fails to signify in the manner provided by paragraph (1) or (2), his election to take the standard deduction or to pay the tax imposed by section 3, as the case may be, such failure shall be considered his election not to take the standard deduction.

(b) Change of election. Under regulations prescribed by the Secretary or his delegate, a change of an election for any taxable year to take or not to take, the standard deduction, or to pay, or not to pay, the tax under section 3, may be made after the filing of the return for such year. If the spouse of the taxpayer filed a separate return for any taxable year corresponding, for purposes of section 142(a), to the taxable year of the taxpayer, the change shall not be allowed unless, in accordance with such regulations:
(1) The spouse makes a change of election with respect to the standard deduction for the taxable year covered in such separate return, consistent with the change of election sought by the taxpayer; and

(2) The taxpayer and his spouse consent in writing to the assessment, within such period as may be agreed on with the Secretary or his delegate, of any deficiency, to the extent attributable to such change of election, even though at the time of the filing of such consent the assessment of such deficiency would otherwise be prevented by the operation of any law or rule of law. This subsection shall not apply if the tax liability of the taxpayer's spouse, for the taxable year corresponding (for purposes of section 142(a)) to the taxable year of the taxpayer, has been compromised under section 7122."

(B) For the purpose of section 235-2.3(d), HRS, the reference in IRC section 144, to sections 3, 4, and 7122 shall be deemed references to sections 235-53, 52, and 231-3(10), HRS, respectively.

(C) A taxpayer whose adjusted gross income as shown by his return equals to or exceeds the amount provided under section 235-53, HRS, or who otherwise is ineligible to use the optional tax tables but is eligible for the standard deduction (such as a person entitled to the special exemption under section 235-54(c), HRS, shall be allowed the standard deduction if he elects on such return to take such deduction. Such taxpayer shall so signify by claiming on his return the ten percent standard deduction instead of itemizing the non-business deductions allowed in computing taxable income.

(D) A change of election must be made within the period of three years after filing of the return for the taxable year involved, or within three years of the due date prescribed for the filing of said return, whichever is later.

(E) The director cannot allow an overpayment credit after expiration for the period of time prescribed in section 235-111, HRS, which limits both credits and assessments of additional taxes. This period of time is not extended by the making of a change of election.

(e) Employee annuity. (I.R.C. Section 403). Taxation of employee annuity shall be the same except for the amount of premium withheld from the salary of an employee by the Department of Education and the University of Hawaii for the purchase of an annuity contract under Act 40, S.L.H. 1967. This amount is includible as taxable gross income and subject to the withholding tax provisions of this State. Amendments to I.R.C. Section 403 by Public Law 87-370, section 3 were not adopted by this State. (See section 235-2.3(e), HRS.)

(f) Administering pensions, profit sharing, etc. (I.R.C. Section 401 to 415).

(1) The Department of Taxation shall follow the applicable provisions set forth in the federal tax regulations in respect to related provisions of I.R.C. Sections 410 to 415.

(2) Records substantiating (i) all data and information on returns (as defined in I.R.C. Section 6103 (b) required on all forms and reports, (ii) authenticated copies of the federal returns filed relating to pensions, profit sharing, stock bonus and other retirement plans, (iii) assessments made by the Internal Revenue Service, including tax on premature distributions (I.R.C. Section 72(m)(5)) and excise taxes imposed by I.R.C. Sections 4971 to 4975, shall be kept and made available for inspection at the principal place of business of the self-employed individual or the employer maintaining the plan or the plan administrator (defined in I.R.C. Section 414(g)) at all times. (See section 235-2.3(f), HRS).

(g) Unrelated business taxable income. (I.R.C. Sections 512 to 515).

(1) In general. The federal regulations relating to the taxation of unrelated business taxable income shall apply to the State except that in the computation thereof sections 235-3 to 235-5, and 235-7 (except subsection (c)), HRS, shall also apply, and any amount of income or deduction which is excluded in computing the unrelated business taxable income shall not be allowed in determining the net operating loss deduction under section 235-7(d), HRS. Any income from a prepaid legal service plan shall not be considered. (See section 235-2.3(g), HRS).

(2) Returns. Every person and organization, described in section 235-9, HRS, which is otherwise exempt from income tax and which is subject to income tax imposed on unrelated business taxable income under section 235-2.3(g), HRS, shall file a return for each taxable year if it has gross income of $1,000 or more included in computing unrelated business taxable income for such taxable year. The filing of a return of unrelated business income does not relieve the person or organization of other filing requirements.

(h) With respect to estates and trusts, the following rules apply.

(1) With regard to section 641(a) (with respect to tax on estates and trusts), IRC, as operative under chapter 235, HRS, the applicable tax rates are as set forth in section 235-51(d), HRS.
(A) If an estate or trust has a net capital gain, the estate or trust may elect the alternative tax set forth in section 235-51(f), HRS.

(B) Estates and trusts are not allowed the standard deduction, except that the estate of an individual in bankruptcy shall be allowed the standard deduction in section 235-2.4(a)(4), HRS, pursuant to section 1398(c)(3) (with respect to basic standard deduction in an individual's title 11 case), IRC, if the estate does not itemize deductions.

(C) Estates and trusts shall not use the tax tables to compute tax.

(2) Section 642(a) (with respect to foreign tax credit), IRC, is not operative in Hawaii. A resident trust shall be allowed a credit for taxes paid to another jurisdiction to the extent permitted by section 235-55, HRS, and the rules thereunder, but only in respect of so much of those taxes paid to another jurisdiction that is not properly allocable to any beneficiary. A nonresident trust shall not be allowed the credit in section 235-55, HRS.

(3) Section 642(b) (with respect to deduction for personal exemption), IRC, is not operative in Hawaii. An estate or trust shall be allowed the deduction for personal exemption set forth in section 235-54(b), HRS. A trust shall be eligible for the personal exemption of $200 under section 235-54(b)(2), HRS, if it is required by the terms of its governing instrument to distribute all of its income currently, whether or not the trust is described in section 651 (with respect to simple trusts), IRC.

Example 1: A trust's governing instrument provides that all of its income is to be distributed to charity every year. Although the trust is not a simple trust under section 651, IRC, it is eligible for the $200 personal exemption.

Example 2: A trust's governing instrument provides that $1000 is to be distributed to its sole beneficiary every year. The trust is eligible for the $200 personal exemption in any year in which the trust's income is not more than $1000.

(4) With regard to section 642(d) (with respect to unlimited deduction for amounts paid or permanently set aside for a charitable purpose), IRC, as operative under chapter 235, HRS, an estate or trust shall be allowed a deduction equal to the smaller of the following two amounts:
(A) The amount allowable under section 681 (with respect to limitation on charitable deduction), IRC; or

(B) The greater of the amounts in clause (i) and (ii):
(i) The amount qualifying under section 642(c), IRC, that is paid, or permanently set aside, to be used exclusively in Hawaii for charitable purposes; or

(ii) The amount qualifying under section 642(c), IRC, that is actually paid for charitable purposes, subject to the percentage limitations in section 170(b)(1) (with respect to percentage limitations applicable to contributions by an individual), IRC. In computing the percentage limitations, the contribution base of the estate or trust shall be adjusted gross income as defined in section 235-1, HRS, computed without regard to any net operating loss carryback to the taxable year.

(5) Section 642(d) (with respect to net operating loss deduction), IRC, is not operative in Hawaii. An estate or trust shall be allowed the net operating loss deduction to the extent permitted by section 235-7(d), HRS, and the rules thereunder.

(6) With respect to section 644 (with respect to gain on property transferred to trust at less than fair market value), IRC, as operative under chapter 235, HRS:
(A) In section 644(a)(2)(A), IRC, the tax shall be computed under chapter 235, HRS; and

(B) In section 644(a)(2)(B), IRC, the interest rate shall be that specified in section 231-39(b)(4), HRS.

(7) With respect to section 667 (with respect to treatment of amounts deemed distributed by a complex trust in preceding years), IRC, as operative under chapter 235, HRS:
(A) In section 667(a)(1) and (2), IRC, the tax shall be computed under chapter 235, HRS; and

(B) Interest income exempt from Hawaii tax under section 235-7, HRS, in the hands of a trust, retains its character when distributed to a beneficiary pursuant to section 662(b) (with respect to character of amounts distributed), IRC. Other interest income that is not exempt from Hawaii tax in the hands of a trust pursuant to section 235-7(b), HRS, is considered a taxable amount for purposes of computing the tax under section 667, IRC, when that income is distributed.

(8) Section 668 (with respect to interest charge on accumulation distributions from foreign trusts), IRC, is not operative in Hawaii.

(i) to (k) (Reserved)

(l) Capital loss carrybacks and carryovers. (I.R.C. section 1212).

(1) In general. The federal regulations relating to capital loss carrybacks and carryovers in the Internal Revenue Code shall be operative except that the provisions relating to capital loss carryback shall not be operative and the capital loss carryover allowed by I.R.C. section 1212(a) shall be limited to five years. Individual taxpayers shall be allowed capital loss carryovers until exhausted. (See section 235-2.3(l), HRS.)

(m) Subchapter S. (I.R.C. sections 1371 to 1379).

(1) In general. The federal regulations relating to the Internal Revenue Code on election of small business corporation shall be operative subject to certain other requirements and modifications for this State. (See section 235-2.3(l), HRS.)
(A) A small business corporation shall not have (A) A nonresident as a shareholder; or

(B) A resident individual who has taken up residence in the State after age 65 and before 7/1/76 and who is taxed under chapter 235 only on the income from within this State, unless such individual shall have waived the benefit of section 3, Act 60, L. 1976, and shall have included all income from sources within and without this State in the same manner as if the individual had taken up residence in the State after 6/30/76.

(2) Election. Effective 1/1/79, an election under I.R.C. Section 1372(a) not to be subject to income taxes shall terminate for the taxable year in which such corporation derives more than 80 percent of its gross income from sources outside the State. Termination shall remain in effect for all succeeding taxable years.
(A) An election under I.R.C. section 1372 shall not be valid unless there is also in effect for such taxable year, an election for federal tax purposes.

(B) The tax imposed by I.R.C. section 1378(a) is hereby imposed by this chapter and shall be at a rate of 3.08 percent on the amount by which the net capital gain exceeds $25,000.00. For purposes of I.R.C. section 1378(c)(3), the amount of tax to be determined shall not exceed 3.08 percent of the net capital gain attributable to property described under that section.

(3) Returns. Every small business corporation as described in I.R.C. section 1371 and this article shall file an income tax return for each taxable year on Form N-35, stating specifically items of its gross income and deductions and such other information as required by the form or in the instruction issued thereto provided under section 235-80, HRS.

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