RE:  Adoption of Certain Retroactive Provisions of the Internal Revenue Code
and Amendments to Estimated Tax Provisions

Act 13, Session Laws of Hawaii (SLH) 1994, updates Hawaii's conformity to the Internal Revenue Code (IRC) to include amendments made to operative provisions of the IRC by the Revenue Reconciliation Act of 1993. A number of amendments serve to reactivate previously expired provisions or to allow certain deductions and income recognition provisions to be effective for tax years beginning prior to 1994. Other amendments affect Hawaii's estimated tax provisions.

The following listing describes some of the amendments adopted by Act 13, SLH 1994, which may affect many of Hawaii's taxpayers. This list is not intended to be complete, but is merely a general description of some of the changes. Other amendments were adopted and taxpayers are advised to consult their tax practitioners for more information regarding the applicability of those provisions to their particular situation.

Retroactive Provisions
 

1. The low income rental housing credit is permanently extended applicable to periods ending after June 30, 1992. (IRC section 42)

 
2. The income exclusion of employer-provided education assistance is extended through December 31, 1994. Effective for tax years ending after June 30, 1992. (IRC section 127(d))

 
3. The deduction for health insurance costs of self-employed individuals is temporarily extended for tax years ending after June 30, 1992. This deduction is not available after December 31, 1993, and shall not be allowed for any calendar month for which the taxpayer is eligible to participate in any subsidized health plan maintained by any employer of the taxpayer or of the taxpayer's spouse. Any amounts paid by self-employed individuals which qualify for the deduction allowed under this section shall not qualify as an allowable expense for the itemized deduction for medical expenses. (IRC section 162(l)(2) & (6))

 
4. Taxpayers may elect to include any amount of their net capital gain in their investment income when computing their allowable investment interest deduction. If the election is made, capital gains that are otherwise eligible for the capital gains tax rate must be reduced by the amount included as investment income. Effective for tax years beginning after December 31, 1992. (IRC section 163(d)(4)(B))

 
5. The amount a taxpayer may elect to deduct, rather than depreciate, is increased from $10,000 to $17,500 of the cost of section 179 property placed in service during the taxable year. Applies for tax years beginning after December 31, 1992. (IRC section 179(b)(1))

 
6. Taxpayers whose principal residence (or its contents) is involuntarily converted as a result of a Presidentially declared disaster qualify for special tax treatment regarding certain insurance proceeds. No gain is recognized on the receipt of insurance proceeds for personal property that was part of the residence's contents, if such property was not scheduled under the insurance policy. Any other insurance proceeds received for the residence or its contents may be treated as a common pool of funds. If the funds are used to purchase property that is similar or related in service or use to the converted residence (or its contents), the taxpayer may elect to recognize gain only to the extent that the pool of funds exceeds the cost of the replacement property. The replacement period is extended from 2 years to 4 years after the close of the first taxable year in which any part of the gain upon conversion is realized. Renters who receive insurance proceeds with respect to a disaster-related involuntary conversion of their property in a rented residence also will qualify for disaster loss relief to the extent that the residence would constitute their principal residence if they owned it. Effective for property involuntarily converted as a result of disasters for which a Presidential declaration is made on or after September 1, 1991, and to tax years ending on or after that date. (New IRC section 1033(h))

Taxpayers who are affected by these changes and have not already filed their 1993 tax return should have these changes reflected in the preparation of their return. Taxpayers who have already filed their tax returns for 1993, and earlier years if applicable, should file amended returns on Form N-188X to take advantage of the changes.

Provisions Affecting Estimated Taxes
 

1. Required installments of estimated tax for individual taxpayers shall be the lesser of 90 per cent of the current year's tax or 110 per cent of the tax shown on the return for the prior taxable year, if the adjusted gross income shown on the return of the individual for the preceding taxable year exceeds $150,000.

 
2. Required installments of estimated tax for corporations shall be the lesser of 100 per cent of the current year's tax or 100 per cent of the tax shown on the return of the corporation for the preceding taxable year. Corporations may compute estimated tax payments by placing income for specified monthly periods on an annualized basis. For this purpose, a corporation must use a standard set of monthly periods, or it may elect to use one of two optional sets of monthly periods. The election is made on or before the date required for paying the first installment for the year. For the 1994 tax year, this election must be made on or before the date required for paying the first installment due after April 20, 1994. Use federal Form 8842 to make this election. Note that the 1994 Form N-3, Declaration of Estimated Income Tax for Corporations and S Corporations, does not reflect these changes.

These amendments made by Act 13, SLH 1994, shall apply, according to the Act, to taxable years beginning after December 31, 1993. Section 235-2.5, Hawaii Revised Statutes (HRS), however, provides that retroactive provisions in federal Public Laws amending sections of the IRC operative for Hawaii income tax purposes affecting taxable years beginning or ending before the December 31 conformity date contained in section 235-2.3, HRS, shall be operative for Hawaii income tax purposes. In other words, Hawaii recognizes the same effective dates as are recognized under federal law.
 

/s/
RICHARD F. KAHLE, JR.
Director of Taxation