SB 1465: Taxation; Pass-Through Entities; S Corporations; Partnerships

A BILL FOR AN ACT

RELATING TO PASS-THROUGH ENTITY TAXATION.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

     SECTION 1.  Section 235-51.5, Hawaii Revised Statutes, is amended by amending subsection (e) to read as follows:

     "(e)  Each qualified member of an electing pass-through entity whose distributive share or guaranteed payment of Hawaii taxable income is subject to tax under this section shall be entitled to a credit equal to the qualified member's share of the tax paid pursuant to this section.  If the amount of the credit authorized by this subsection exceeds the qualified member's tax liability imposed pursuant to this chapter, the excess of the credit over liability may be used as a credit against the member's net income tax liability in subsequent years until exhausted.  Any qualified member claiming a credit shall not be entitled to deduct from the member's Hawaii state taxable income those amounts of Hawaii state income taxes paid by the member on the qualified member's distributive share or guaranteed payment of income from the electing pass-through entity.  Any qualified member claiming a credit shall add to the qualified member's taxable income the qualified member's share of taxes paid by an electing pass-through entity under this section."

     SECTION 2.  New statutory material is underscored.

     SECTION 3.  This Act shall take effect on July 1, 3000, and shall apply to taxable years beginning after December 31, 2024.

Report Title:

Taxation; Pass-Through Entities; S Corporations; Partnerships

Description:

For taxable years beginning after 12/31/2024, requires all qualified members claiming a credit for pass-through entity taxation to adjust their income to include the qualified member's share of taxes paid by an electing pass-through entity.  Effective July 1, 3000.  (HD1)

The summary description of legislation appearing on this page is for informational purposes only and is not legislation or evidence of legislative intent.

A BILL FOR AN ACT

RELATING TO PASS-THROUGH ENTITY TAXATION.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

     SECTION 1.  Section 235-51.5, Hawaii Revised Statutes, is amended by amending subsection (e) to read as follows:

     "(e)  Each qualified member of an electing pass-through entity whose distributive share or guaranteed payment of Hawaii taxable income is subject to tax under this section shall be entitled to a credit equal to the qualified member's share of the tax paid pursuant to this section.  If the amount of the credit authorized by this subsection exceeds the qualified member's tax liability imposed pursuant to this chapter, the excess of the credit over liability may be used as a credit against the member's net income tax liability in subsequent years until exhausted.  Any qualified member claiming a credit shall not be entitled to deduct from the member's Hawaii state taxable income those amounts of Hawaii state income taxes paid by the member on the qualified member's distributive share or guaranteed payment of income from the electing pass-through entity.  Any qualified member claiming a credit shall add to the qualified member's taxable income the qualified member's share of taxes paid by an electing pass-through entity under this section."

     SECTION 2.  New statutory material is underscored.

     SECTION 3.  This Act shall take effect on July 1, 2050, and shall apply to taxable years beginning after December 31, 2024.

Report Title:

Taxation; Pass-Through Entities; S Corporations; Partnerships

Description:

For taxable years beginning after 12/31/2024, requires all qualified members claiming a credit for pass-through entity taxation to adjust their income to include the qualified member's share of taxes paid by an electing pass-through entity.  Effective July 1, 2050.

The summary description of legislation appearing on this page is for informational purposes only and is not legislation or evidence of legislative intent.

A BILL FOR AN ACT

RELATING TO PASS-THROUGH ENTITY TAXATION.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

     SECTION 1.  Section 235-51.5, Hawaii Revised Statutes, is amended by amending subsection (e) to read as follows:

     "(e)  Each qualified member of an electing pass-through entity whose distributive share or guaranteed payment of Hawaii taxable income is subject to tax under this section shall be entitled to a credit equal to the qualified member's share of the tax paid pursuant to this section.  If the amount of the credit authorized by this subsection exceeds the qualified member's tax liability imposed pursuant to this chapter, the excess of the credit over liability may be used as a credit against the member's net income tax liability in subsequent years until exhausted.  Any qualified member claiming a credit shall not be entitled to deduct from the member's Hawaii state taxable income those amounts of Hawaii state income taxes paid by the member on the qualified member's distributive share or guaranteed payment of income from the electing pass-through entity.  Any qualified member claiming a credit shall add to the qualified member's taxable income the qualified member's share of taxes paid by an electing pass-through entity under this section."

     SECTION 2.  New statutory material is underscored.

     SECTION 3.  This Act, upon its approval, shall apply to taxable years beginning after December 31, 2024.

Report Title:

Taxation; Pass-Through Entities; S Corporations; Partnerships

Description:

For taxable years beginning after December 31, 2024, requires all qualified members claiming a credit for pass-through entity taxation to adjust their income to include the qualified member's share of taxes paid by an electing pass-through entity.

The summary description of legislation appearing on this page is for informational purposes only and is not legislation or evidence of legislative intent.

STAND. COM. REP. NO.  1947

Honolulu, Hawaii

                , 2025

RE:   S.B. No. 1465

      S.D. 1

      H.D. 1

Honorable Nadine K. Nakamura

Speaker, House of Representatives

Thirty-Third State Legislature

Regular Session of 2025

State of Hawaii

Madame:

     Your Committee on Finance, to which was referred S.B. No. 1465, S.D. 1, entitled:

"A BILL FOR AN ACT RELATING TO PASS-THROUGH ENTITY TAXATION,"

begs leave to report as follows:

     The purpose of this measure is to require, for taxable years beginning after December 31, 2024, any qualified member claiming a credit for pass-through entity taxation to add to the member's taxable income the member's share of taxes paid by an electing pass-through entity.

     Your Committee received testimony in support of this measure from the Department of Taxation.  Your Committee received comments on this measure from the Tax Foundation of Hawaii.

     Your Committee finds that taxpayers claiming the pass-through entity tax credit receive a double benefit in the form of the credit and a reduction of taxable income because the entity is permitted to deduct the pass-through entity taxes paid on the member's behalf.  This measure requires any qualified member claiming a pass-through entity credit to add the taxes back to the qualified member's taxable income to eliminate the double benefit.

Your Committee has amended this measure by:

     (1)  Changing its effective date to July 1, 3000, to encourage further discussion; and

     (2)  Making a technical, nonsubstantive amendment for the purposes of clarity, consistency, and style.

     As affirmed by the record of votes of the members of your Committee on Finance that is attached to this report, your Committee is in accord with the intent and purpose of S.B. No. 1465, S.D. 1, as amended herein, and recommends that it pass Second Reading in the form attached hereto as S.B. No. 1465, S.D. 1, H.D. 1, and be placed on the calendar for Third Reading.

Respectfully submitted on behalf of the members of the Committee on Finance,

STAND. COM. REP. NO. 547

Honolulu, Hawaii

RE:    S.B. No. 1465

       S.D. 1

Honorable Ronald D. Kouchi

President of the Senate

Thirty-Third State Legislature

Regular Session of 2025

State of Hawaii

Sir:

     Your Committee on Ways and Means, to which was referred S.B. No. 1465 entitled:

"A BILL FOR AN ACT RELATING TO PASS-THROUGH ENTITY TAXATION,"

begs leave to report as follows:

     The purpose and intent of this measure is to require, for taxable years beginning after December 31, 2024, qualified members of an electing pass-through entity to adjust their taxable income by adding back their share of taxes paid by the electing pass‑through entity.

     Your Committee received testimony in support of this measure from the Department of Taxation.

     Your Committee received comments on this measure from the Tax Foundation of Hawaii.

     Your Committee recognizes that current state taxation law allows partnerships and S corporations to elect to pay state income taxes at the entity level, with a corresponding tax credit available to qualified members of the electing pass-through entity equal to their pro rata share of the entity taxes paid.  The tax and related tax credit were intended to allow these entities to take advantage of federal income tax deductions with no revenue impact to the State.  Your Committee also recognizes, however, that taxpayers claiming the state tax credit currently receive a double benefit, which results in a revenue loss for the State.  Specifically, qualified members of a pass-through entity receive both:

     (1)  A tax credit equal to their share of pass-through entity taxes paid by their corresponding pass-through entities; and

     (2)  A reduction of their taxable income from the pass‑through entities,

because pass-through entity tax payments may be deducted at the entity level as business expenses.

     Accordingly, your Committee finds merit in eliminating this double benefit, which may be accomplished by requiring qualified members of pass-through entities to add to their taxable incomes their share of pass‑through entity taxes paid.

     Your Committee has amended this measure by changing the effective date to July 1, 2050, to facilitate further discussion on the measure.

     As affirmed by the record of votes of the members of your Committee on Ways and Means that is attached to this report, your Committee is in accord with the intent and purpose of S.B. No. 1465, as amended herein, and recommends that it pass Second Reading in the form attached hereto as S.B. No. 1465, S.D. 1, and be placed on the calendar for Third Reading.

Respectfully submitted on behalf of the members of the Committee on Ways and Means,