Section 235-51.5 - Pass-through entity taxation election(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: (1) Each member of the entity who is a member at the time the election is filed; or(2) Any officer, manager, or member of the entity who is authorized to make the election and who attests to having such authorization under penalty of perjury; 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 qualified member's distributive shares and guaranteed payments of Hawaii taxable income as calculated under this chapter, multiplied by nine per cent. 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 qualified 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 qualified members, for each tax year, the member's pro rata share of the tax imposed pursuant to this section.(e) Each qualified 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 qualified member's share of the tax paid pursuant to this section. If the amount of the credit authorized by this subsection exceeds the qualified member's tax liability imposed pursuant to this chapter, the excess of the credit over liability may be used as a credit against the member's net income tax liability in subsequent years until exhausted. Any qualified 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 qualified member's distributive share or guaranteed payment of income from the electing pass-through entity.(f) Each qualified 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 qualified 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 qualified 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: "Electing pass-through entity" means any eligible partnership or S corporation that elects to be subject to tax pursuant to subsection (a).
"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.
"Qualified member" means a member of an electing pass-through entity that is an individual, trust, or estate.
"S corporation" means a corporation for which a valid election under section 1362(a) of the Internal Revenue Code is in effect.
Amended by L 2024, c 50,§ 2, eff. 6/19/2024, app. to taxable years beginning after 12/31/2023.Added by L 2023, c 50,§ 2, eff. 1/1/2024, app. to taxable years beginning after 12/31/2022.