Hawaii Administrative Rules
Title 18 - DEPARTMENT OF TAXATION
Chapter 235 - INCOME TAX LAW
Subchapter 2 - DIVISION OF INCOME FOR TAX PURPOSES
Section 18-235-31-02 - Property factor; valuation of rented property

Universal Citation: HI Admin Rules 18-235-31-02

Current through August, 2024

(a) Property rented or leased by the taxpayer is valued at eight times its net annual rental rate.

(1) The net annual rental rate for any item of rented property is the annual rental rate paid by the taxpayer for the property less the aggregate annual subrental rates paid by subtenants of the taxpayer. (See section 18-235-38-02 for special rules when the use of such net annual rental rate produces a negative or clearly inaccurate value or when property is used by the taxpayer at no charge or is rented at a nominal rental rate.)

(2) Subrents are not deducted when the subrents constitute business income because the property which produces the subrents is used in the regular course of a trade or business of the taxpayer when it is producing that income. Accordingly, there is no reduction in its value.

Example 1: The taxpayer receives subrents from a bakery concession in a food market operated by the taxpayer. Since the subrents are business income, they are not deducted from rent paid by the taxpayer for the food market.

Example 2: The taxpayer rents a five-story office building primarily for use in its multistate business, uses three floors for its offices, and manages and subleases two floors to various other businesses and persons such as professional people and shops. The rental of the two floors is incidental to the operation of the taxpayer's trade or business. Since the subrents are business income, they are not deducted from the rent paid by the taxpayer.

Example 3: The taxpayer rents a twenty-story office building and uses the lower two stories for its general corporation headquarters. The taxpayer hires an unrelated property management company to manage and sublease the remaining eighteen floors to others. The rental of the eighteen floors is not incidental to but rather is separate from the operation of the taxpayer's trade or business. Since the subrents are nonbusiness income they shall be deducted from the rent paid by the taxpayer.

(b) As used in this section:

"Annual rental rate" means the amount paid as rental for property for a twelve-month period (i.e., the amount of the annual rent).

(1) Where property is rented for less than a twelve-month period, the rent paid for the actual period of rental shall constitute the annual rental rate for the tax period.

(2) Where a taxpayer has rented property for a term of twelve or more months and the current tax period covers a period of less than twelve months (due, for example, to a reorganization or change of accounting period), the rent paid for the short tax period shall be annualized.

(3) If the rental term is for less than twelve months, the rent shall not be annualized beyond its term.

(4) Rent shall not be annualized because of the uncertain duration when the rental term is on a month-to-month basis.

Example 1: Taxpayer A, which ordinarily files its returns based on a calendar year, is merged into Taxpayer B on April 30. The net rent paid under a lease with five years remaining is $2,500 a month. The rent for the tax period January 1 to April 30 is $10,000. After the rent is annualized the net rent is $30,000 ($2,500 x 12).

Example 2: Same facts as in Example 1 except that the lease would have terminated on August 31. In this case, the annualized rent is $20,000 ($2,500 x 8).

"Rent" means the actual sum of money or other consideration payable, directly or indirectly, by the taxpayer or for its benefit for the use of the property.

(1) Rent includes any amount payable for the use of real or tangible personal property, or any part of it, whether designated as a fixed sum of money or as a percentage of sales, profits, or otherwise.

Example: A taxpayer, pursuant to the terms of a lease, pays a lessor $1,000 per month as a base rental and at the end of the year pays the lessor one percent of its gross sales of $400,000. The annual rent is $16,000 ($12,000 plus one percent of $400,000 or $4,000).

(2) Rent includes any amount payable as additional rent or in lieu of rents, such as interest, taxes, insurance on the demised premises, repairs, or any other items which are required to be paid by the terms of the lease or other arrangement, not including amounts paid as service charges, such as utilities or janitor services. If a payment includes rent and other charges unsegregated, the amount of rent shall be determined by consideration of the relative values of the rent and other items.

Example 1: A taxpayer, pursuant to the terms of a lease, pays the lessor $12,000 a year rent plus taxes in the amount of $2,000 and interest on a mortgage in the amount of $1,000. The annual rent is $15,000.

Example 2: A taxpayer stores part of its inventory in a public warehouse. The total charge for the year was $1,000 of which $700 was for the use of storage space and $300 for inventory insurance, handling and shipping charges, and C.O.D. collections. The annual rent is $700.

(3) Rent does not include incidental day-to-day expenses such as hotel or motel accommodations, or daily rental of motor vehicles.

(4) Rent does not include royalties based on extraction of natural resources, whether represented by delivery or purchase. For this purpose, a royalty includes any consideration conveyed or credited to a holder of an interest in property which constitutes a sharing of current or future production of natural resources from such property, irrespective of the method of payment or how such consideration may be characterized, whether as a royalty, advance royalty, rental, or otherwise.

(c) Leasehold improvements, for purposes of the property factor, shall be treated as property owned by the taxpayer regardless of whether the taxpayer is entitled to remove the improvements or the improvements revert to the lessor upon expiration of the lease. Hence, the original cost of leasehold improvements shall be included in the factor.

(d) If a payment is made by a taxpayer to acquire a leasehold interest or a leased fee, rent includes the portion of the payment that is reported by the taxpayer as rental expense.

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