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Act 172 complies with Hawaii Revised Statutes (HRS) § 235-2.5(c), which directs the Department of Taxation (Department) to submit to each regular session of the Legislature, a bill to conform to subtitle A, chapter 1 of the Internal Revenue Code (IRC) as it applies to the determination of gross income, adjusted gross income, ordinary income, and loss, and taxable income.

Among the federal laws reviewed by the Department, were:

• The Fallen Hero Survivor Benefit Fairness Act of 2001, (Public Law 107-15);
• An Act To Amend the Internal Revenue Code of 1986 To Rename The Education Individual Retirement Accounts as the Coverdell Education Savings Accounts (Public Law 107-22);
• The Revenue Provisions of the Railroad Retirement and Survivors' Improvement Act of 2001 (Public Law 107-90);
• An Act To Amend the Internal Revenue Code of 1986 To Simplify the Reporting Requirements Relating to Higher Education Tuition and Related Expenses (Public Law 107-131);
• Victims of Terrorism Tax Relief Act of 2001 (Public Law 107-134);
• Job Creation and Worker Assistance Act of 2002(JCWAA) (Public Law 107-147);
• The Clergy Housing Allowance Clarification Act of 2002 (Public Law 107-181);
• Revenue Provision of the Trade Adjustment Assistance Reform Act of 2002 (Public Law 107-210);
• Veterans Benefits Improvement Act of 2002 (Public Law 107-330); and
• The Holocaust Restitution Tax Fairness Act of 2002 (Public Law 107-358).

Section 2 of Act 172 amends HRS § 235-2.3 (a) to conform the Hawaii Income Tax Law to the operative IRC sections of subtitle A, chapter 1, amended as of December 31, 2002. Generally, subtitle A, chapter 1, refers to IRC §§ 1 through 1400. For conformity purposes, the federal effective dates for amendments to operative IRC sections are adopted. Act 172 conforms Hawaii's income tax law to the following changes in the IRC:

• Expansion of the exclusion from income for qualified foster care payments;
• Provisions to close a loophole used by shareholders of bankrupt S corporations and sanctioned by the Supreme Court;
• Limitation on the use of non-accrual experience method of accounting;
• Extension of the Archer MSA program through December 31, 2003;
• Clarification that the limit for catch-up contributions applies to all qualified retirement plans, tax-sheltered annuity plans, SEPs and SIMPLE plans maintained by the same employer on an aggregated basis, as if all plans were a single plan; and
• The above the line deduction for expenses incurred by elementary and secondary schoolteachers for materials used by a teacher in the classroom under IRC §62(a)(2).

Section 3 of Act 172 amends HRS §235-2.4, relating to operative IRC sections for which the State provides specific treatment, by providing that Hawaii does not conform to §IRC 168(k), which concerns the "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. This deduction is allowed for certain property acquired after September 10, 2001, and before September 11, 2004.

Section 4 of Act 172 amends HRS §235-7 to provide that Hawaii does not conform to the expansion of the net operating loss (NOL) carry back period from two to five years for NOLs in the 2001 or 2002 tax years. A Hawaii taxpayer with a NOL in a tax year ending 2001 or 2002, therefore, may carry back the NOL only two years for Hawaii tax purposes.

The Department will be posting a digest of the 2002 federal tax laws listing all of the conforming and non-conforming items at our website.

Current forms and other tax information are available at the Department's website at: www.hawaii.gov/tax. If you know which tax form or publication you need, please call the Department's request line at 808-587-7572, or toll-free from the neighbor islands and continental U.S. at 1-800-222-7572. This service is available 24 hours a day, 7 days a week.