Hawaii Administrative Rules
Title 18 - DEPARTMENT OF TAXATION
Chapter 235 - INCOME TAX LAW
Subchapter 6 - RETURNS AND PAYMENTS; ADMINISTRATION
Section 18-235-110.7-11 - Basis of eligible property

Universal Citation: HI Admin Rules 18-235-110.7-11

Current through August, 2024

(a) In general. The basis of eligible property means the cost of property.

(b) "Cost", defined. Cost of property means the lesser of either:

(1) The actual invoice price of eligible property; or

(2) The basis from which a deduction is taken under I.R.C. §167 (with respect to depreciation) or under I.R.C. §168 (with respect to ACRS).

In either case, the amount under paragraph (1) or (2) must be subject to the imposition and payment of tax at the rate of four percent under chapter 237 or 238, HRS.

(c) New section 38 property.

(1) In general. The basis of new section 38 property which has been constructed, reconstructed, or erected for the taxpayer's use includes that portion of the cost of the property which is (A) placed in service after December 31, 1987, and (B) subject to the imposition and payment of tax at the rate of four percent under chapter 237 or 238, HRS. The portion of the cost of the property which is placed in service before January 1, 1988, is not eligible for the credit.

(2) Whether the cost or other basis of the construction, reconstruction, or erection is attributable to all or part of a property placed in service before or after December 31, 1987, may be determined by engineering estimates or by cost accounting records.

(3) In the case of reconstructed property, the cost of property does not include the adjusted basis of the reconstructed property at the time the reconstruction commences. However, after December 31, 1988, the reconstructed property may qualify as used section 38 property (as discussed in section 18-235-110.7-06), and the cost of the property may include the adjusted basis of the reconstructed property at the time the reconstruction commences if the adjusted basis of the property is subject to the imposition and payment of tax at the rate of four percent under chapter 237 or 238, HRS.

(4) Examples: Paragraphs (1), (2), and (3) are illustrated as follows:

Example 1. In 1989, a taxpayer reconditions a machine which the taxpayer constructed and placed in service in 1987. The machine has an adjusted basis of $9,000 in 1987. The cost of materials in the reconditioning process which are subject to the imposition and payment of tax at the rate of four percent under chapter 237, HRS, is $3,000. The basis of the machine which shall be taken into account to compute the amount of credit for 1989 is $3,000, regardless of whether the materials used for reconditioning are new in use.

Example 2. A machine with a total cost of $100,000 is placed in service after December 31, 1987. The cost of materials attributable to construction by the taxpayer and which is subject to the imposition and payment of tax at the rate of four percent under chapter 237, HRS, is $30,000. In this case, the $30,000 amount shall be taken into account by the taxpayer as the basis to determine the amount of credit allowable for the new section 38 property.

(5) Constructed, reconstructed, or erected property which is placed in service over a span of more than one taxable year. If constructed, reconstructed, or erected property, qualifying as eligible property, is placed in service over a span of more than one taxable year, the credit shall be allowed to the taxpayer for a particular taxable year with respect to so much of the eligible property that is (A) placed in service after December 31, 1987, and (B) subject to the imposition and payment of tax at the rate of four percent under chapter 237 or 238, HRS, in that taxable year.

(6) Example. Paragraph (5) is illustrated as follows:

In 1988, X Corporation enters into a long-term contract with Y Corporation, a builder, to construct energy properties. Assume that the energy properties qualify as eligible properties. Assume further that in 1988, (1) 25 percent of the eligible properties are placed in service, and (2) subject to the imposition and payment of tax at the rate of four percent under chapter 237, HRS. In 1988, X is allowed a credit with respect to the eligible properties which are placed in service and for which a tax at the rate of four percent is imposed and paid under chapter 237, HRS. For succeeding taxable years, X is allowed an additional credit for the additional percentages of the eligible properties which are placed in service and for which a tax at the rate of four percent under chapter 237, HRS, is imposed and paid as of the close of that subsequent taxable year.

(d) Used section 38 property. The basis of used section 38 property is the cost of the property which is subject to the imposition and payment of tax at the rate of four percent under chapter 237 or 238, HRS. The dollar limitations on the cost of used section 38 property as stated in I.R.C. §48(c)(2)(A), (B), (C), or (D), as amended as of December 31, 1984, do not apply for purposes of the credit.

(e) Basis for eligible property of a partnership, S corporation, estate, or trust. In the case of a partnership, S corporation, estate, or trust, the credit allowable is for eligible property which is placed in service by the entity. The basis upon which the credit is computed is determined at the entity level. Each partner, S corporation shareholder, or beneficiary of an estate or trust shall separately take into account for its taxable year with or within which the entity's taxable year ends, the partner's, shareholder's, or beneficiary's share of the basis and resulting credit. A partner's share of the basis shall be determined in accordance with the ratio (in effect on the date on which the eligible property is placed in service) in which the partners divide the general profits of the partnership. The basis of partnership eligible property which is subject to a special allocation that is recognized under I.R.C. §704(a) and 704(b) (with respect to partner's distributive share), shall be recognized for purposes of the credit, and an upward basis adjustment pursuant to I.R.C. §754 (regarding manner of electing optional adjustment to basis of partnership property) is not eligible for the credit. A basis adjustment under I.R.C. §754 is not eligible for the credit because the adjustment is not a transaction which is subject to the imposition and payment of tax at the rate of four percent under chapter 237 or 238, HRS. Each S corporation shareholder's basis of eligible property is the shareholder's allocated share of the corporation's basis in the eligible property. A beneficiary's share of the basis is apportioned between the entity and the beneficiaries, based on the income of the entity allocable to each on the date the eligible property is placed in service. The term "beneficiary" includes an heir, legatee, or devisee.

(f) Examples. Subsection (e) is illustrated as follows:

Example 1. Partnership ABCD places in service on January 1, 1988, and September 1, 1988, items of eligible property. Partnership ABCD and each of its partners report income on the calendar year basis. Partners A, B, C, and D share partnership profits equally. Each partner's share of the basis of each eligible property which was placed in service by partnership ABCD is 25 percent, and each partner's credit is 25 percent of the total credit allowable for the eligible property.

Example 2. Assume the facts as in example 1 and the following additional facts. Partner A dies on June 30, 1988, and partner B purchases partner A's interest as of that date. Each partner's share of the profits from January 1, to June 30, is 25 percent. From July 1, to December 31, B's share of the profits is 50 percent, and partners C and D's share of the profits is 25 percent each. For partner A's last taxable year (i.e., January 1, to June 30, 1988), partner A's share of the basis and resulting credit for eligible property which was placed in service on January 1, is 25 percent. Partner B shall take into account 25 percent of the basis and resulting credit for eligible property which was placed in service on January 1, and 50 percent of the basis of the eligible property which was placed in service on September 1. Partners C and D shall each take into account 25 percent of the basis and resulting credit for each eligible property which was placed in service by the partnership in 1988.

(g) Basis limitation if a deduction is taken under I.R.C. §179. If a deduction is taken under I.R.C. §179 (regarding an election to expense certain depreciable business assets), the portion of the basis of property for which the deduction is taken is not considered in determining the amount of credit allowable.

(h) Example. Subsection (g) is illustrated as follows:

A taxpayer purchases section 179 property (as defined in I.R.C. §179(d)) for $5,000. The taxpayer elects to treat $2,000 of the cost of the property as an expense under I.R.C. §179(d). In this case, the taxpayer shall only be allowed to compute the credit on a basis of $3,000 ($5,000 -$ 2,000).

(i) Basis limitation for automobiles. For purposes of determining the amount of credit available, the basis for passenger automobiles used predominantly (over fifty percent) for business purposes is limited to $11,250.

(1) The limit applies to four-wheeled vehicles rated at six thousand pounds or less which are manufactured principally for use on public roads. The limit does not apply to an ambulance, hearse, truck, van, or other vehicle used directly in the trade or business of transporting persons or property for compensation or hire.

(2) This limitation applies prior to any percentage reduction for personal use (as discussed in section 18-235-110.7-11(j)).

(3) If more than one taxpayer have an interest in a passenger automobile, they are treated as one taxpayer for purposes of the basis limitation. The limitation is to be apportioned among the taxpayers according to their interests in the automobile.

(4) Examples. Subsection (i) is illustrated as follows:

Example 1. A calendar-year taxpayer places in service a $20,000 passenger automobile for business use in taxable year 1989. The maximum credit allowable in this case is $450 ($11,250 x 4%).

Example 2. If the taxpayer in example 1 uses the automobile for personal purposes 25 percent of the time in the year the automobile is placed in service, the maximum credit allowable is $337.50 ($11,250 x 75% x 4%).

(j) Basis limitation for listed property which does not satisfy the more-than-fifty percent business use test. Listed property will not be treated as eligible property, and the credit is denied if the listed property does not satisfy the more-than-fifty percent business use test.

(1) "Listed property", defined. Listed property is generally defined as passenger automobiles and other property used as a means of transportation; property generally used for purposes of entertainment, recreation, or amusement; computers and related peripheral equipment; and other property as determined by the department.

(2) "The more-than-fifty percent business use test", defined. The more-than-fifty percent business use test requires that certain business use of listed property (referred to as qualified business use) exceeds fifty percent.
(A) "Qualified business use", defined. For purposes of determining the more-than-fifty percent business use test, use in a trade or business does not include use in an investment or other activity conducted for the production of income. However, if the more-than-fifty percent business use test has been met, the percentage of investment use may be added in when figuring the total business use for purposes of calculating the amount of credit allowable.

(B) Examples. Subparagraph (A) is illustrated as follows:

Example 1. The taxpayer places in service in 1989, listed property that is used 45 percent for qualified business use and 55 percent for investment purposes. In this case, since the qualified business use does not satisfy the more-than-50 percent business use test, no credit is allowable.

Example 2. A calendar year taxpayer places in service in 1989, listed property with a cost of $5,000. The listed property is used 55 percent for qualified business use, 35 percent for investment activities, and 10 percent for personal purposes. In this case, since the more-than-50 percent business use test has been met, the percentage of investment use may be added in when figuring the total business use for purposes of calculating the amount of credit allowable. The credit is thereby determined and allowed on 90 percent (55% + 35%) of the basis which is the combined business use. The credit allowable is $180 (90% x $5,000 x 4%).

(3) If the qualified business use satisfies the more-than-fifty percent business use test, but is not used one hundred percent for business, the amount of credit is limited to the percentage of business use.

(4) Example. Paragraph (3) is illustrated as follows:

A listed property is used 60 percent for business and is otherwise eligible for the credit. In this case, the taxpayer is allowed to determine the amount of credit based on only 60 percent of the basis.

(5) The amount of credit allowable in the taxable year in which the listed property is placed in service is unaffected by any increase in the business use percentage in a subsequent year. However, if there is a reduction in the business use of property, then the credit taken with respect to the listed property may be subject to recapture (as discussed in section 18-235-110.7-15(b)).

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