Hawaii Response to Bonus Depreciation

CCH, 7/15/02

A Hawaii Department of Taxation announcement discusses Act 223 (S.B. 2824), Laws 2002, which conformed Hawaii corporate and personal income tax laws to the IRC as of December 31, 2001.

Federal Economic Growth and Tax Relief Reconciliation Act
Act 223 conformed Hawaii laws to many of the changes made to the IRC by the federal Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRAA) (P.L. 107-16), including IRC changes related to (1) education IRAs, (2) qualified tuition programs, (3) the exclusion for employer-provided educational assistance, (4) individual retirement accounts (IRAs), (5) qualified retirement plans, (6) rollovers of retirement plan and IRA distributions, (7) the purchase of service credit under governmental pension plans, and (8) the treatment of employer-provided retirement advice.

However, Act 223 did not conform Hawaii laws to the EGTRAA deduction for qualified higher education expenses or the EGTRAA amendment to the dependent day care credit.

Job Creation and Worker Assistance Act
Act 223 did not conform Hawaii laws to the changes made to the IRC by the federal Job Creation and Worker Assistance Act of 2002 (JCWAA) (P.L. 107-147).

Announcement No. 2002-15, Hawaii Department of Taxation, July 3, 2002.

STT, 6/12/02

In adopting the state's annual conformity measure, Hawaii lawmakers noted that SB 2824, CD-1 will not pick up provisions of the federal Job Creation and Worker Assistance Act of 2002 because the bill adopts the Internal Revenue Code as of December 31, 2001. (For the full text of SB 2824, CD-1, see Doc 2002-11865 (7 original pages) [PDF] or 2002 STT 97-14 .)

The conference committee report notes that because President Bush signed the federal act in March of this year, the provisions "are not applicable for Hawaii income tax purposes for the 2001 taxable year and subsequent years." At the same time, the conference committee report notes "a bonus depreciation deduction and expansion of the net operating
loss carryback period from two to five years for NOLs in the 2001 or 2002 taxable years."

It is that bonus depreciation deduction that has some practitioners concerned. Under the federal provision, taxpayers are now entitled to an additional first-year depreciation deduction equal to 30 percent of the adjusted basis of qualified property acquired after September 10, 2001, and before September 11, 2004.

While the issue of the bonus depreciation was raised by the Department of Taxation and by lawmakers soon after President Bush signed the federal act into law, it appears that lawmakers were unwilling to accommodate the provision because of the projected revenue loss. By the time lawmakers convened the conference committee, the price tag had escalated beyond $50 million in the first year.

Faced with balancing the state budget, lawmakers could not find a way to adopt the depreciation provision with its estimated revenue loss. They will now have to address that situation next year.

CCH,5/17/02:

Taxpayers claiming the additional federal deductions allowed under the JCWAA must adjust the taxable income reported on their Hawaii  returns as described below.
                                     
Bonus Depreciation
To adjust for the federal bonus depreciation allowance under IRC Sec. 168, a Hawaii taxpayer claiming a depreciation deduction must (1) complete federal Form 4562 or federal Form 2106, whichever is applicable, for Hawaii tax purposes using the federal depreciation guidelines in effect before adoption of the JCWAA; (2) attach the completed federal form to the Hawaii tax return; (3) make the necessary adjustments to the Hawaii return for the depreciation difference between federal and Hawaii; and (4) attach to the Hawaii return any worksheet showing the computation of the adjustments.
                                   
 A taxpayer who files federal and Hawaii returns claiming bonus depreciation must file an amended Hawaii return that does not claim bonus depreciation. Under a provision requiring taxpayers who file an amended federal return to also file an amended Hawaii return, a taxpayer who files an amended federal  return to claim the bonus depreciation allowance must also file an amended Hawaii return.
                                    
NOL Carryback
To adjust for the federal five-year carryback of a net operating loss (NOL) under IRC Sec. 172(b), a Hawaii taxpayer with an NOL in a tax year ending in 2001 or 2002 may carry back the NOL for only two years for Hawaii purposes.
                                    
Discharges of Indebtedness of S Corporations
To adjust for the federal treatment of discharges of indebtedness of S corporations under IRC Sec. 108(d), an S corporation shareholder may increase the basis in the shareholder's stock for Hawaii purposes.  Announcement No. 2002-4, Hawaii Department of Taxation, May 14, 2002.