Act 297 encourages the continued growth and development of high technology industries in Hawaii by expanding several tax incentives that were enacted in Act 178, Session Laws of Hawaii 1999 (Act 178), and adding other tax incentives. These incentives allow Hawaii to compete in the "New Economy," an economy based on knowledge and ideas characterized by innovation and rapid convergence of technology, telecommunications, and media.
I. Tax Incentives Under Act 297
A. Sale of Unused Net Operating Loss Carryovers
Act 297 allows qualified high technology businesses to sell their unused net operating loss carryovers (NOLs) provided that the sale is for an amount equal to at least 75% of the surrendered tax benefit and the sale does not exceed $500,000 per year.1 This applies only to NOLs occurring in the two taxable years preceding the year in which the sale of NOLs occurs and applies to sales of NOLs after December 31, 2000, and before January 1, 2004.
B. Carryover of Unused Capital Losses
Both federal and Hawaii law allow corporations a five-year carryover of unused capital losses. Act 297 extends the five-year capital loss carryover period for qualified high technology businesses to fifteen years for Hawaii income tax purposes.
C. Trade Secrets and Performing Arts Products Not Subject to Income Tax
Act 178 excludes royalties and income derived from patents and copyrights received by an individual or a qualified high technology business from gross income for income tax purposes. Act 297 expands the exclusion to include income derived from trade secrets and performing arts products.
D. Stock Option Income Not Subject to Income Tax
The income tax exemption under Act 178 for stock option income received by an employee of a qualified high technology business is expanded under Act 297 to include stock option income received by an employee, officer, director, or investor (if the investor qualifies for the high technology business investment tax credit). This income tax exemption also applies to income earned and proceeds derived from the sale of stock received through the exercise of stock options.
E. High Technology Business Investment Tax Credit
Act 178 enacted a 10% nonrefundable income tax credit to encourage investment in high technology businesses up to a maximum allowed credit of $500,000 per year per investor. Act 297 eases the requirements to qualify for the credit.
F. Research and Development Income Tax Credit
Act 297 expands Act 178's conformity to the federal research and development income tax credit in section 41 of the Internal Revenue Code (which is based upon a percentage of certain increased research expenses) by: 1) increasing the State tax credit from 2.5% to 20% to match the federal credit; 2) making the State credit refundable; and 3) specifying that the State credit is available for tax years 2000-2005 even if the federal credit is repealed prior to January 1, 2006.
The foregoing tax incentives under Act 297 generally apply retroactive to taxable years beginning after December 31, 1999 subject to specific provisions as noted.
II. Workshop to Explain Tax Incentives
In conjunction with the High Technology Development Corporation (HTDC) and the High Technology Trade Association, the tax incentives under Act 297 and other laws (e.g., general excise tax exemption for exported services and contracting and general excise tax pyramiding relief) will be discussed in a workshop on Thursday, August 17, 2000 from 9:00 a.m. to 12:00 p.m. in the Garden Lanai of the Ala Moana Hotel. There will be a charge of $25 for this workshop ($35 for late registration) and seating is limited to 100 people. At the workshop attendees will have the opportunity to meet one to one with Department of Taxation staff to answer questions on high technology issues for specific business or client scenarios. Please call Sandy Park of the HTDC at: 808-539-3794 (or e-mail: email@example.com) for reservations or additional information.
More detailed high technology tax information is available at the Department's website at: www.state.hi.us/tax and select the link to "High Technology."
On Oahu, forms may be ordered by calling the Department's Forms Request Line at: 808-587-7572. Persons who are not calling from Oahu, may call: 1-800-222-7572 (toll-free) to receive forms by mail or 808-678-0522 from a fax machine to receive forms by fax.
RAY K. KAMIKAWA
Director of Taxation
HRS Sections Explained: HRS Sections 235-1, 235-2.4, 235-7.3, 235-9.5, 235-110.9, and 235-110.91.
1 Although not clear under Act 297 the department interprets a qualified high technology business for purposes of the sale of NOLs the same as defined for the stock option income tax exemption.