(a) Scope. Chapter
242, HRS, excludes the following from the determination of state taxes: All
income from mortgage loans which are made on or after June 3, 1957 and prior to
June 3, 1963, and which are guaranteed or insured by the Federal Housing
Administration or the Veterans Administration. To qualify for this exclusion
the income must be earned or received by a lender making such loans in the
State.
(1) If the loan was made by such lender
prior to June 3, 1957 the exclusion does not apply even though the loan was
guaranteed or insured on or after June 3, 1957.
(2) The state taxes affected by chapter
242, HRS, are the Income Tax Law,
chapter
235, HRS, General Excise Tax Law,
chapter 237, HRS, Public Service Company Tax Law, chapter
239, HRS, and Taxation of Banks and
Other Financial Corporations, chapter
241, HRS.
(b) Deductions to be allocated according to
source of income. Bad debts and losses deductible, if any, under the applicable
tax law shall be allocated to the particular source of income involved.
Deductions of all bad debts and losses attributable to or connected with the
income excluded pursuant to chapter
242, HRS, are disallowed.
(c) Deductions to be apportioned according to
source of income.
(1) Deductions of taxpayers
who exclude income pursuant to HRS § 242-1, other than bad debts or losses
as set forth in § 18-242-1(b), shall be apportioned to disallow any amount
attributable to or connected with excluded income. The deductions that shall be
apportioned include the following: expenses, interest, taxes, contributions or
gifts, depreciation, and amounts contributed under employees' benefit plans to
the extent they are deductible under the applicable tax law, and the return or
dividends of building and loan associations deductible under section 591 of the
Internal Revenue Code as adopted by chapter
235, HRS. The taxes that shall be
apportioned include federal and state income taxes, to the extent that they are
deductible under the applicable tax law. Deductible amounts of gains or
dividends or interest derived or received shall not be apportioned.
(2) The method of apportioning the disallowed
deductions to the income excluded by chapter
242, HRS, is as follows:
(A) Determine the ratio of the income
excluded by chapter
242, HRS, to the gores income
determined under the applicable tax law. The gross income in the denominator
shall include the income excluded by chapter
242, HRS, and any dividends or
interest derived or received that is excludable or deductible under the
applicable tax law. The income excluded by chapter
242, HRS, is the net amount in excess
of the bad debts and losses allocated pursuant to § 18-242-1(b), less
however, any amount of capital gain that is excludable or deductible under the
applicable tax law.
(B) Apply this
ratio to the total amount of deductions (other than bad debts and losses
allocated pursuant to subsection (b)) computed under the applicable tax law
involved without regard to this subsection (c).
