Corporate Close-Up: Tell Me Something I Don’t Know About Hawaii’s Taxes Paid Deduction

In a continuation of our new “Tell Me Something I Don’t Know” blog series, our guest Thomas Yamachika, a leading tax attorney in Hawaii and co-author of Bloomberg BNA’s Hawaii’s Corporate Income Tax Navigator, explains how individual taxpayers conducting business through a pass-through entity in Hawaii might be able to take advantage of an important notice issued by the Hawaii Department of Taxation.

As background, Hawaii amended its income tax laws in 2011 through S.B. 570 to cut off the itemized deduction for state income taxes for individuals making more than a certain amount of adjusted gross income based on filing status. As part of that act, corporations were also prohibited  from deducting state taxes paid under the relevant federal itemized deduction provisions, I.R.C. § 164(a)(3) and (b)(5).

In response to the bill, the Hawaii Department of Taxation released Announcement 2011-20, which explained that corporate taxpayers are still able to deduct state income and excise taxes. The document states that the bill “has no effect on a corporate taxpayer’s ability to deduct income tax or general excise tax as an ordinary and necessary business expense under I.R.C. § 162.”

In theory, individual taxpayers with either Schedule C businesses or who receive income from pass-through business entities could also avoid this disallowance of a deduction for state taxes paid under the same rationale as that used for corporations in Announcement 2011-20. 

Yamachika notes that the “provision’s weakness should be realized and the provision should be repealed or fixed.” Though presumably while it is still around, taxpayers should consider the merits of taking a position based on Announcement 2011-20.

Tune in to Corporate Close-Up next week to learn more about the intricacies of state businesses taxes.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: What else don’t we know about Hawaii’s tax system?

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