HONOLULU - The state Department of Taxation today issued a Tax Information Release (TIR) regarding Act 221, a law passed by the Hawaii State Legislature in 2001 that gives a Hawaii tax credit to taxpayers who invest in qualifying companies.

Although referred to as a 100 percent credit, the law actually enables some investors to receive more tax credit than they invest in qualifying companies.

Act 221 is intended to stimulate investment in hi-tech and certain performing arts businesses that contribute to Hawaii's economy on an ongoing and meaningful basis.

Act 221 reportedly has been used by certain investors and advisors in ways that are inconsistent with legislative intent or that do not satisfy basic common law requirements.  For example, the credit reportedly has been claimed for investments in one-shot movie deals that do not contribute to Hawaii's economy on an ongoing basis.  Other investors reportedly have claimed the credit for “investing” money in companies that pay the money back to the investors for services rendered.  Still other investors are reportedly claiming the credit on the basis of related party transactions.

The TIR discusses these and other potentially abusive investments and steps that the Department will be taking to address them.

"Act 221 is very generous by design, but some investors have pushed it beyond what was intended," said Interim Director of Taxation Kurt Kawafuchi.  "Investors in certain deals claim to qualify for a high multiple of the credit, for example, $4 of credit for every $1 they invest.  With the issuance of this release, we hope to eliminate any doubt in peoples' minds about whether Act 221 allows the kind of abuses being reported.  It does not."