(a)A partnership or S corporation may elect to be taxed pursuant to this section as an electing pass-through entity in any tax year; provided that a separate election shall be made for each taxable year. An election made pursuant to this subsection shall be filed in the form and manner prescribed by the director of taxation and signed by:
Terms Used In Hawaii Revised Statutes 235-51.5
- Corporation: A legal entity owned by the holders of shares of stock that have been issued, and that can own, receive, and transfer property, and carry on business in its own name.
- Internal Revenue Code: means subtitle A, chapter 1, of the federal Internal Revenue Code of 1986, as amended as of December 31, 2022, as it applies to the determination of gross income, adjusted gross income, ordinary income and loss, and taxable income, except those provisions of the Internal Revenue Code which, pursuant to this chapter, do not apply or are otherwise limited in application. See Hawaii Revised Statutes 235-2.3
- Partnership: A voluntary contract between two or more persons to pool some or all of their assets into a business, with the agreement that there will be a proportional sharing of profits and losses.
provided that once the election is made, it shall be irrevocable for that taxable year and shall be binding on all partners, shareholders, and members of the electing pass-through entity.
(b)Notwithstanding any provision of law to the contrary, the following tax is imposed on each electing pass-through entity: the sum of all member’s distributive shares and guaranteed payments of Hawaii taxable income as calculated under this chapter, multiplied by the highest rate of tax applicable to the individual under section 235-51; provided that the distributive shares and guaranteed payments of members who are corporations shall not be included in the sum and shall not be subject to the tax under this section. If the income calculated pursuant to this subsection reflects a net loss for the electing pass-through entity, the net loss may be carried forward to subsequent tax years for as long as the electing pass-through entity elects to be subject to the tax pursuant to this section until exhausted.
(c) A nonresident individual who is a member of an electing pass-through entity shall not be required to file an income tax return pursuant to this chapter for a tax year if the member’s only source of Hawaii income is from electing pass-through entities and the electing pass-through entity or entities file and pay the tax due under this section.
(d) Each electing pass-through entity shall report to each of its members, for each tax year, the member’s pro rata share of the tax imposed pursuant to this section.
(e)Each member of an electing pass-through entity whose distributive share or guaranteed payment of Hawaii taxable income is subject to tax under this section shall be entitled to a credit equal to the member’s share of the tax paid pursuant to this section. If the amount of the credit authorized by this subsection exceeds the member’s tax liability imposed pursuant to this chapter, the excess amount shall not be refundable to the member. Any member claiming a credit shall not be entitled to deduct from the member’s Hawaii state taxable income those amounts of Hawaii state income taxes paid by the member on the member’s distributive share or guaranteed payment of income from the electing pass-through entity.
(f)Each member that is subject to the tax imposed by this chapter as a resident or part-year resident of the State shall be entitled to a credit for the direct member’s or indirect member’s pro rata share of taxes paid to another state or to the District of Columbia, on income of any partnership or S corporation of which the person is a member; provided that the taxes paid to another state or to the District of Columbia result from a tax that the director of taxation determines is substantially similar to the tax imposed pursuant to this section. Any credit shall be calculated in a form and manner prescribed by the director of taxation; provided that the calculation is consistent with the provisions of this section. If the amount of the credit authorized by this subsection exceeds the member’s tax liability for the tax imposed pursuant to this chapter, the excess amount shall not be refundable and shall not carry forward.
(g) The department of taxation may establish rules, pursuant to chapter 91, to implement this section.
(h)For purposes of this section:
“Direct member” means a member that holds an interest directly in an electing pass-through entity.
“Electing pass-through entity” means any eligible partnership or S corporation that elects to be subject to tax pursuant to subsection (a).
“Indirect member” means a member that itself holds an interest, through a direct member or indirect member that is a partnership or S corporation, in an electing pass-through entity.
“Member” means:
(1) A shareholder of an S corporation;
(2) A partner in a general partnership, a limited partnership, or a limited liability partnership; or
(3) A member of a limited liability company that is treated as a partnership or S corporation for federal income tax purposes.
“Partnership” means the same as in the Internal Revenue Code. “Partnership” includes a limited liability company that is treated as a partnership for federal income tax purposes but does not include any publicly traded partnership within the meaning of section 7704 of the Internal Revenue Code.
“S corporation” means a corporation for which a valid election under section 1362(a) of the Internal Revenue Code is in effect.”
