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DEPARTMENT OF TAXATION ANNOUNCEMENT NO. 2002-5
May 14, 2002
RE: The Federal Job Creation And Worker Assistance Act Of 2002 Does Not Apply To Hawaii Taxes

Hawaii’s Income Tax Law does not automatically conform to changes made by Congress to the Internal Revenue Code. Hawaii law requires the Department of Taxation (Department) to introduce legislation each year that may include changes to the IRC made by Congress in the previous year. See Hawaii Revised Statutes (HRS) §235-2.5(c).

The Department introduced legislation in the 2002 Hawaii Legislative Session that will apply the IRC, as amended, “as of December 31, 2001.” Because President Bush signed the Job Creation and Worker Assistance Act of 2002 (JCWAA) into law on March 9, 2002, the JCWAA did not amend the IRC “as of December 31, 2001.” The legislation passed by the Hawaii Legislature (S.B No. 2824, S.D. C.D. 1) provides that the JCWAA provisions are not applicable for Hawaii income tax purposes for the 2001 tax year. These provisions will not be applicable in subsequent years unless the Legislature, in a subsequent legislative session, amends the law to specifically include the JCWAA provisions.

Taxpayers claiming the additional federal deductions under the JCWAA must adjust the taxable income reported on the Hawaii return for those deductions.

This announcement discusses the following JCWAA provisions:

“Bonus” Depreciation Including The Increased Limit For Luxury Car Depreciation Deduction

The JCWAA amended IRC section 168 to provide for a first-year “bonus” depreciation deduction. The “bonus” depreciation deduction is equal to 30% of the basis of a qualified asset. The “bonus” depreciation deduction includes an increased limit (from $3,060 to $7,660) for the luxury car depreciation deduction. 1 To be eligible for the “bonus” depreciation, the qualified asset must be placed in service after September 10, 2001, and before September 11, 2004.

If a depreciation deduction is claimed for Hawaii tax purposes, the taxpayer must: (a) complete either a federal Form 4562 or a federal Form 2106, whichever is applicable, for Hawaii tax purposes using the federal depreciation guidelines in effect before the adoption of the JCWAA, (b) attach the applicable completed federal Form 4562 or Form 2106 to the Hawaii tax return, (c) make the necessary adjustments to the Hawaii tax return for the depreciation difference between federal and Hawaii, and (d) attach to the Hawaii tax return any worksheet showing the computation of the adjustments. This is illustrated in the following examples.

Example 1: A corporation that files income tax returns on a calendar year conducts business only in Hawaii. The corporation’s activities are not passive activities. On September 15, 2001, the corporation purchases equipment for $100,000 and places the equipment into service. The equipment has a life of five years for tax purposes. The taxpayer does not elect to claim an IRC §179 expense for the equipment. The corporation did not purchase or place in service any other tangible personal property during 2001 and uses MACRS 200% declining balance method and ½ year convention to calculate the depreciation deduction. Under the JCWAA, the taxpayer is allowed an additional first-year depreciation deduction of $30,000. The remaining $70,000 of adjusted basis is recovered in 2001 and subsequent years. The depreciation deduction claimed for federal tax purposes would be $44,000 ($30,000 ($100,000 * 30%) plus $14,000 ($70,000)*20%)).

For Hawaii tax purposes, the depreciation deduction would be limited to $20,000 ($100,000*20%). The corporation must: (a) complete federal Form 4562 for Hawaii tax purposes, (b) attach the completed federal Form 4562 to the Form N-30, (c) report $24,000 ($44,000-$20,000) as an addition to income on Form N-30, Schedule J, Line 2(b), and (d) attach to Form N-30 a worksheet showing the computation of the adjustment.

The corporation must also keep records of the differences in the asset’s depreciable basis for federal and Hawaii tax purposes.

Example 2: A partnership that files on a calendar year conducts business only in Hawaii. The partnership’s business activities are not passive activities. On September 15, 2001, the partnership purchases a luxury automobile for $40,000 and places the automobile into service. The automobile is used 100% in the partnership’s business. The partnership did not purchase or place in service any other tangible personal property in 2001 and uses MACRS 200% declining balance method and ½ year convention in calculating the depreciation deduction for tax purposes. The partnership is limited to a depreciation deduction of $3,060 with respect to the automobile. Under the JCWAA, the taxpayer is allowed an additional first-year depreciation allowance of $4,600. The depreciation deduction claimed for federal tax purposes would be $7,660 ($3,060 plus $4,600).

For Hawaii tax purposes, the depreciation deduction would be limited to $3,060.

The partnership must (a) complete federal Form 4562 for Hawaii tax purposes, (b) attach the completed federal Form 4562 to the Form N-20, (c) report $4,600 ($7,660-$3,060) as an addition to income on Form N-20, Line 11a, and (d) attach to Form N-20 a worksheet showing the computation of the adjustment.

The partnership must also keep records of the differences in the asset’s depreciable basis for federal and Hawaii tax purposes.

Example 3: A Hawaii resident individual plans to file the Form N-11. The individual conducts business only in Hawaii, and the individual’s business activity is not a passive activity. On September 15, 2001, the individual purchases equipment for $1,000 and begins using the equipment in the individual’s business. The equipment has a life of five years for tax purposes. The individual did not purchase or place in service any other tangible personal property in 2001, does not elect to claim an IRC §179 expense for the equipment, and uses MACRS 200% declining balance method and ½ year convention in calculating the depreciation deduction for tax purposes. Under the JCWAA, the individual is allowed an additional first-year depreciation allowance of $300. The remaining $700 of adjusted basis is recovered in 2001 and subsequent years. The depreciation deduction claimed for federal tax purposes would be $440 ($300 ($1,000 * 30%) plus $140 ($700)*20%)).

For Hawaii tax purposes, the depreciation deduction would be limited to $200 ($1,000*20%). The individual must (a) complete federal Form 4562 for Hawaii tax purposes, (b) attach the completed federal Form 4562 to the Form N-11, (c) report $240 ($440-$200) as an addition to income on Form N-11, Line 10, and (d) attach to Form N-11 a worksheet showing the computation of the adjustment.

The individual must also keep records of the differences in the asset’s depreciable basis for federal and Hawaii tax purposes.

If a taxpayer files a federal tax return claiming the “bonus depreciation” and a Hawaii tax return claiming the “bonus depreciation,” the taxpayer must file an amended Hawaii tax return without the “bonus depreciation” which is not permitted by Hawaii Income Tax Law.

If a taxpayer files an amended federal tax return to claim a depreciation deduction for the “bonus” depreciation allowance, the taxpayer must also file an amended Hawaii return. 2

5-Year Carryback Of A Net Operating Loss

The JCWAA amended IRC section 172(b) to allow for a net operating loss (NOL) in a tax year ending 2001 or 2002, to be carried back five years (versus the current two year carryback period).

A Hawaii taxpayer with a NOL in a tax year ending 2001 or 2002 may carry back the NOL only two years for Hawaii tax purposes.

Discharge Of Indebtedness Of An S Corporation

The JCWAA amended IRC section 108(d) to change the treatment of certain discharge of indebtedness of an S-corporation. If a S-corporation’s debt is discharged and the discharge is excluded from income under IRC section 108, the shareholder of the S-corporation may not increase the basis in the shareholder’s stock for the exclusion from income. This provision generally applies to discharges of indebtedness after October 11, 2001.

If an S-corporation’s debt is discharged and the discharge is excluded from income under IRC section 108, a shareholder may increase the basis in the taxpayer’s stock for Hawaii income tax purposes.

Current forms and other tax information are available at the Department’s website at: www.hawaii.gov/tax. On Oahu, forms may be ordered by calling the Department’s Forms Request Line at: 587-7572. Persons who are not calling from Oahu, may call: 1-800-222-7572 (toll-free) to receive forms by mail or by fax.

/s/
MARIE Y. OKAMURA
Director of Taxation
FOOTNOTES
1 The JCWAA amended IRC section 168 by adding subsection k, SPECIAL ALLOWANCE FOR CERTAIN PROPERTY ACQUIRED AFTER SEPTEMBER 10, 2001, AND BEFORE SEPTEMBER 11, 2004. Subsection (k) provides that in the case of a passenger automobile (as defined in IRC section 280F(d)(5)) which is qualified property, the limitation under section 280F(a)(1)(A)(i) is increased by $4,600.
2 §235-101(b), HRS, provides that every person who is required to make a return must report to the Department, as to any taxable year governed by this chapter, if an amended income tax return is made to the United States. The report shall be made within ninety days after the amended return is filed.