Tax reform has been the one of the top news stories for the past few months, with numerous tax experts, economists, political analysts, and accountants examining the impact of Pub. L. No. 115-97 on not only federal taxes but also state taxes. SALT deduction caps, along with the property tax prepayment frenzy in certain states, have received a lot of coverage. But a Hawaii financial institution tax also illustrates another issue for states: I.R.C. conformity.
Hawaii’s franchise tax on financial institutions is based on the organizations’ entire net income from all sources for the preceding calendar year (for fiscal-year taxpayers, the preceding fiscal year). However, for institutions that have net capital gains and would have a higher tax liability under the default franchise tax, Hawaii applies I.R.C. § 1201’s alternative tax: it is based on taxable income, minus the net capital gain, plus 4 percent of the gain for the taxable year.
Pub. L. No. 115-97 repealed § 1201, effective for taxable years beginning Jan. 1, 2018. Does this mean that Hawaii’s financial institutions alternative tax is immediately dead? The answer is a bit more complicated than just “yes” or “no.”
Many states conform to the federal tax code for their own tax codes, as recent Tax Foundation and Tax Policy Center reports explain. State conformity comes in generally two flavors: static and rolling. While rolling conformity means a state conforms automatically to changes to the I.R.C., Hawaii conforms on a static basis—to the version of § 1201 that existed on Dec. 31, 2016.
Per Haw. Rev. Stat. §§ 235-2.5(c) and 236E-4(c), the Hawaii Department of Taxation submits bills each legislative session to update conformity to the I.R.C. for income (subtitle A, chapter 1 of the I.R.C.), estate, and generation-skipping transfer (subtitle B) tax laws to the most current version. S.B. 2821 and companion H.B. 2394, introduced on Jan. 24, propose updating the I.R.C. version to which Hawaii conforms to Dec. 31, 2017.
So, is the Hawaii financial institutions alternative tax dead if Hawaii changes its conformity date? Haw. Rev. Stat. 235-2.3(b) carves out specific exceptions conformity, and lawmakers can always add the financial institutions alternative tax to this list, along with other provisions they prefer to keep instead of conforming to the I.R.C.
Make sure to tune into Bloomberg Tax coverage to keep up with Hawaii’s conformity legislation, as well as other states’ tax reform reactions.
Continue the discussion Bloomberg BNA’s State Tax Group on LinkedIn: Is your state considering changing its conformity date?
For more information on the impact of Pub. L. No. 115-97, examine Bloomberg Tax’s Tax Reform Roadmap, showing detailed comparisons between pre-reform law and impending changes, with pertinent cites attached.
Get a free trial to Bloomberg BNA Tax & Accounting’s State Tax solution, a comprehensive research service that provides deep analysis and time-saving practice tools to help practitioners make well-informed decisions.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to email@example.com.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to firstname.lastname@example.org.
Put me on standing order
Notify me when new releases are available (no standing order will be created)