Draft Announcement re Act 215

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Draft Announcement re Act 215 Powered By Docstoc
					                                                      February xx, 2005


DEPARTMENT OF TAXATION ANNOUNCEMENT NO. 2005-xx
RE:       New Certification Forms

          •    Form N-318A, CERTIFIED STATEMENT OF INVESTMENT IN A QUALIFIED
               HIGH TECHNOLOGY BUSINESS AND CLAIM OF THE HIGH TECHNOLOGY
               BUSINESS INVESTMENT TAX CREDIT

          •    Form N-319A, CERTIFIED STATEMENT OF RESEARCH AND DEVELOPMENT
               COSTS INCURRED BY A QUALIFIED HIGH TECHNOLOGY BUSINESS AND
               CLAIM OF THE TAX CREDIT FOR RESEARCH ACTIVITIES

        Act 215, Session Laws of Hawaii 2004, Relating to Capital Investments (Act 215)
requires certification from the Department of Taxation (Department) as a prerequisite to claim
the high technology business investment tax credit for investments made on or after July 1, 2004,
and the tax credit for research activities for research expenses incurred on or after July 1, 2004.
See §§ 235-110.90 and 235-110.91, Hawaii Revised Statutes (HRS). Any taxpayer or
partnership (for income tax purposes) claiming such credits must: (1) submit a properly
completed Form N-318A and/or Form N-319A to the Department; and (2) attach the
Department-issued certificates to the tax return as a prerequisite to claim the credits.

          This Announcement explains the certification requirements.

        Forms N-318A was revised and N-319A was developed in December 2004 to allow
taxpayers submit the required certification information in order to receive the necessary
certificates for the tax year 2004.

I.        Overview of the High Technology Business Investment Tax Credit

       Hawaii allows a non-refundable income tax credit for investments1 in a qualified high
technology business (QHTB).2 The credit is based upon the amount invested in a QHTB and is


1 "Investment" is defined in section 235-1, HRS, as a nonrefundable cash investment in a QHTB, which is at risk of loss (see
IRC section 465(b) for definition of amounts considered at risk), in exchange for stock, interests in partnerships, joint ventures,
or other entities, licenses, rights to use technology, marketing rights, warrants, and options. The nonrefundable investment is
entirely at risk of loss where repayment depends upon the success of the qualified high technology business. Except for
dividends or interest, no repayment of the investment shall be made for at least one year from the date the investment is made.
The annual amount of any dividend and interest payment to the taxpayer shall not exceed twelve per cent of the amount of the
investment.

2 Section 235-110.9(g), HRS, defines a "QHTB" as a business that employs capital or property, owns capital or property, or
maintains an office in Hawaii, provided that (1) More than fifty per cent of its total business activities are qualified research; and
provided further that the business conducts more than seventy-five per cent of its qualified research in Hawaii; or (2) More than
seventy-five per cent of its gross income is derived from qualified research; and provided further that this income is received
Department of Taxation Announcement No. 2005-xx
February xx, 2005
Page 2
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allowable during a five-year period (per a reclining credit schedule of 35% of the invested
amount in the first year to 10% in the fifth year).3 The credit is capped at $2,000,000 per each
investor's qualified investment in a QHTB at varying amounts ($700,000 in the year the
investment is made to $200,000 in the last year).

       Ten percent (10%) of the credit claimed in the two preceding taxable years will be
recaptured from the taxpayer if the events described in § 235-110.9(d), HRS, occur. Otherwise,
the aggregate credit over the five-year period will equal 100% of the taxpayer’s qualified
investment. § 235-110.9, HRS.

II.       Overview of the Tax Credit for Research Activities

         Hawaii allows a refundable income tax credit to QHTBs4 for their qualified research
activities conducted in Hawaii.5 For purposes of the credit for research activities, the provisions
of Internal Revenue Code § 41, and the Treasury Regulations thereunder, apply except that: (a)
only QHTBs are eligible for this credit; (b) the references to the base amount are not applicable;
(c) only the expenses/costs attributable to the research activities conducted in Hawaii by QHTBs
qualify for the credit; and (d) the credit for all qualified research activities conducted in Hawaii
by QHTBs may be taken without regard to the prior years' expenses/costs. This credit expires for
taxable years beginning after December 31, 2010. §§ 235-2.3(b)(1) and 235-110.91, HRS.

III.      Certification Filing Requirements

       To assist taxpayers in meeting the certification requirements for the high technology
business investment tax credit and the tax credit for research activities for the tax year 2004,
Forms N-318A was revised and N-319A was developed in December 2004.

          A. Form N-318A, Certified Statement of Investment in a Qualified High Technology
             Business and Claim of the High Technology Business Investment Tax Credit

       For investments made on or after July 1, 2004, every taxpayer or partnership (for income
tax purposes) claiming the high technology business investment tax credit (credit) and/or issuing
Schedule K-1s reflecting the distributive/allocated shares of the credit must attach the completed

from: (A) Products sold from, manufactured in, or produced in Hawaii; or (B) Services performed in Hawaii. For purposes of the
credit, see § 235-7.3, HRS, for the definition of "qualified research."

3 The five-year period begins with the tax year the investment was made for investments made through the 2010 tax year. The
credit is also available to taxpayers subject to the Hawaii franchise tax or gross premiums tax. See §§ 241-4.8 and 431:7-209,
HRS.

4 Act 215 limits the credit for research activities to QHTBs.

5 Unlike the high technology business investment tax credit, the tax credit for research activities is not available to taxpayers
subject to the Hawaii franchise tax or gross premiums tax.
Department of Taxation Announcement No. 2005-xx
February xx, 2005
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Part III of Form N-318A (the certificate) to the Hawaii tax return as a prerequisite to either claim
and/or distribute/allocate the credit.

       Although the certificate is not required for claims of the credit attributable to any
investment made prior to July 1, 2004, Form N-318A may be filed for investments made from
January 1, 2004 to June 30, 2004.6 However, the Department will certify only the investments
made after June 30, 2004 and the credit attributable to the investments made after June 30, 2004.

        The Department will not require filings of Form N-318A for investments made prior to
July 1, 2004; therefore, no filing of the earlier versions of Form N-318A is required.

        To obtain the certificate, Form N-318A must be completed, signed, and submitted to the
Department before March 31st of each year if the tax return is filed a calendar year basis. For
fiscal year filers, the due date is before the last day of the third month following the close of the
fiscal year.

       At the time Form N-318A is submitted, a "best estimate" is acceptable if the actual
amounts or final numbers are not available. If Form N-318A was completed based upon a "best
estimate," the Department will generally not require a revised and/or amended Form N-318A.7

         If a properly completed Form N-318A is submitted, the Department will send the signed
Part III of Form N-318A (the certificate) to the mailing address listed on the face of Form N-
318A. The certificate must be attached behind Form N-318 at the time the tax return is filed with
the Department or the Department of Commerce and Consumer Affairs for insurers filing
insurance premium tax returns.

         For situations in which an investor authorizes either the QHTB or the pass-through entity
in which the investor has indirectly invested in a QHTB via the pass-through entity, the
Department will administratively allow either the QHTB or the pass-through entity to complete,
sign, and file Form N-318A on behalf of the investor provided that the QHTB or pass-through
entity has signed authorization from the investor at the time of filing Form N-318A and such
filing is submitted before the aforementioned due date. Notwithstanding the filing of Form N-
318A by either the QHTB or the pass-through entity, all investors are required to attach the
certificates to their Hawaii tax returns as a prerequisite to claim the credit.

        For situations in which there are more than one level of investors in a QHTB, each level
of investors must attach the certificates to their tax returns in order to claim and/or

6 The Insurance Division of DCCA may set forth additional filing requirements for insurers claiming the credit for insurance
premium tax purposes.

7 If the Department finds that the "best estimate" is not acceptable, the Department may require an amended Form N-318A.
Notwithstanding, the Insurance Division of the Department of Commerce and Consumer Affairs (DCCA) may require an
amended Form N-318A for purposes of the insurance premium tax. The taxpayer and/or entity will be notified by either the
Department or DCCA of any required amended Form N-318A.
Department of Taxation Announcement No. 2005-xx
February xx, 2005
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distribute/allocate the credit. In order for Form N-318A to be deemed as timely filed, the "first
level" of investors must send the properly completed Form N-318A before the aforementioned
due date. Any other level of investors must send the properly completed Form N-318A before
the last day of the month preceding the tax return filing due date (including extensions).

       Example 1:

        In July 2004, Individual A contributes $20,000 and Individual B contributes $30,000 in
cash to SPE A, LLC in return for a membership interest. In July 2004, SPE A, LLC contributes
$45,000 in cash and Individual C contributes property (non-cash) to SPE B, LLC in return for a
membership interest. In July 2004, SPE B, LLC contributes $40,000 in cash and Corporation
ABC contributes property (non cash) to a QHTB in return for an equity interest. All of the cash
contributions are at risk and the requirements in §§ 235-1, 235-7.3, and 235-110.9, HRS, have
been met. The only investments made in the calendar year 2004 are the investments noted in this
example. Of the $50,000 cash investments by Individuals A and B, only $40,000 has been
invested in the QHTB. Thus, the credit attributable to the investments made in July 2004 shall
not exceed $40,000 over the five-year period of 2004 through 2008, and the credit to be claimed
with respect to the July 2004 investment shall not exceed $40,000 over the five-year period. SPE
A, LLC, SPE B, LLC, and their members are calendar year filers. For the calendar year 2004,
SPE A, LLC, SPE B, LLC, and their members have up to October 20, 2005 to file their income
tax returns (all required extension applications were timely filed and accepted).

       The Department will administratively allow the QHTB to file Form N-318A on behalf of
SPE B, LLC ("the first level") and SPE A, LLC provided that the QHTB has written
authorization from SPE B, LLC and SPE A, LLC to sign and file Form N-318A on their behalf.
With the written authorization on file, the QHTB submits a properly completed and signed Form
N-318A for itself, SPE B, LLC and SPE A, LLC before March 31, 2005:

       Page 1 of Form N-318A
          Reported in the top portion of Page 1, Form N-318A, is the QHTB's name,
          FEIN, mailing address, and contact information.
          Lines 1 through 3 of Part II is completed and signed by an authorized person
          of the QHTB.
              Reported on Line 1 of Part II is the name and FEIN for the QHTB.
              Reported on Line 2 is SPE B, LLC's $40,000 cash investment in the
              QHTB with a notation that the investment was made between July 1, 2004
              and December 31, 2004 and that the $40,000 cash investment met the
              definition of investment as defined in section § 235-1, HRS.
              Notated on Line 3 is "see attached worksheet (one page)." The one-page
              attachment is a hard and soft copy (3.5" floppy disk or CD) of the
              worksheet listing the following information for SPE B, LLC and SPE A,
              LLC:
              ♦ SPE B, LLC: (a) the name, FEIN, and address for SPE B, LLC, (b) the
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                $40,000 cash investment by SPE B, LLC in the QHTB was made
                between July 1, 2004 and December 31, 2004 and met the definition of
                investment as defined in section § 235-1, HRS, and (c) the amount of
                credit to be claimed by SPE B, LLC for each of tax years 2004, 2005,
                2006, 2007, and 2008; and
              ♦ SPE A, LLC: (a) the name, FEIN, and address for SPE A, LLC, (b)
                the $45,000 cash investment by SPE A, LLC in SPE B, LLC was made
                between July 1, 2004 and December 31, 2004 and met the definition of
                investment as defined in section § 235-1, HRS, and (c) SPE A, LLC's
                expected distributive/allocated share of credit for each of tax years
                2004, 2005, 2006, 2007, and 2008 and ratio of such credit share over
                $45,000 (the amount invested in SPE B, LLC).
              ♦ Reconciling item: explanation that $5,000 of the investments received by SPE
                B, LLC was not invested in the QHTB.

       Page 2 of Form N-318A
          In total, submitted are two Page 2 of Form N-318A: the first Page 2 of Form
          N-318A will reflect SPE B, LLC's information and the second Page 2 of Form
          N-318A will reflect SPE A, LLC's information.
              SPE B, LLC:
              ♦ Reported in the top portion of Page 2 of Form N-318A is SPE B,
                   LLC's name and FEIN;
              ♦ Reported on Line 1 is the name of the QHTB;
              ♦ Reported on Line 2 is the $40,000 cash investment by SPE B, LLC in
                   the QHTB;
              ♦ Reported on Line 3 is the credit to be claimed by SPE B, LLC for each
                   of tax years 2004, 2005, 2006, 2007, and 2008.
              SPE A, LLC:
              ♦ Reported in the top portion of Page 2 of Form N-318A is SPE A,
                   LLC's name and FEIN;
              ♦ Reported on Line 1 is the name of SPE B, LLC;
              ♦ Reported on Line 2 is the $45,000 cash investment by SPE A, LLC in
                   SPE B, LLC;
              ♦ Reported on Line 3 is SPE A, LLC's expected distributive/allocated
                   share of credit for each of tax years 2004, 2005, 2006, 2007, and 2008.

          The Department, not the QHTB, will sign Part III (Page 2 of Form N-318A) if
          the Department finds that the Form N-318A is properly completed.

       Finding that Form N-318A is properly completed, the Department signs and sends
the two completed Part III of Form N-318A (the certificates) to the QHTB at the mailing
address listed on the face of Form N-318A. QHTB provides to SPE B, LLC and SPE A,
Department of Taxation Announcement No. 2005-xx
February xx, 2005
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LLC their certificates. At the time of filing its tax return, SPE B, LLC attaches its
certificate and Form N-318 to its tax return. Please note that that Corporation ABC and
Individual C are not included in the submission of Form N-318A because Corporation
ABC and Individual C did not make qualified investments in the QHTB. SPE B, LLC
and SPE A, LLC each has its own certificate. The written authorization for the QHTB to
file on SPE B, LLC's and SPE A, LLC's behalf does not need to be submitted to the
Department (the QHTB keeps such authorization in its file).

       SPE A, LLC will also be allowed to file Form N-318A on behalf Individuals A and B
provided that SPE A, LLC has written authorization to sign and file Form N-318A on behalf of
Individuals A and B. With the written authorization on file, SPE A, LLC submits the completed
Form N-318A for Individuals A and B, accompanied by a schedule itemizing the information for
Individuals A and B and a completed Part III of Form N-318A for each of Individuals A and B
before September 30, 2005.

       Page 1 of Form N-318A
          Reported in the top portion of Page 1, Form N-318A, is SPE A, LLC's name,
          FEIN, mailing address, and contact information.
          Lines 1 through 3 of Part II is completed and signed by an authorized person
          of SPE A, LLC.
              Reported on Line 1 of Part II is the name and FEIN for SPE A, LLC.
              Reported on Line 2 is the $50,000 cash investment by Individuals A and B
              in SPE A, LLC with a notation that the investment was made between July
              1, 2004 and December 31, 2004 and that the $50,000 cash investment met
              the definition of investment as defined in section § 235-1, HRS.
              Notated on Line 3 is "see attached worksheet (one page)." The one-page
              attachment is a hard and soft copy (3.5" floppy disk or CD) of the
              worksheet listing the following information for Individuals A and B:
              ♦ Individual A: (a) the name, SSN, and address for Individual A, (b) the
                  $20,000 cash investment by Individual A in SPE A, LLC was made
                  between July 1, 2004 and December 31, 2004 and met the definition of
                  investment as defined in section § 235-1, HRS, and (c) Individual A's
                  expected distributive/allocated share of credit for each of tax years
                  2004, 2005, 2006, 2007, and 2008 and ratio of such credit share over
                  $20,000 (the amount invested in SPE A, LLC); and
              ♦ Individual B: (a) the name, SSN, and address for Individual B, (b) the
                  $30,000 cash investment by Individual B in SPE A, LLC was made
                  between July 1, 2004 and December 31, 2004 and met the definition of
                  investment as defined in section § 235-1, HRS, and (c) Individual B's
                  expected distributive/allocated share of credit for each of tax years
                  2004, 2005, 2006, 2007, and 2008 and ratio of such credit share over
                  $30,000 (the amount invested in SPE A, LLC).
              ♦ Reconciling item: explanation that $5,000 of the investments received by SPE
Department of Taxation Announcement No. 2005-xx
February xx, 2005
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                   A, LLC was not invested in SPE B, LLC.

       Page 2 of Form N-318A
          In total, submitted are two Page 2 of Form N-318A: the first Page 2 of Form
          N-318A will reflect Individual A's information and the second Page 2 of Form
          N-318A will reflect Individual B's information.
              Individual A:
              ♦ Reported in the top portion of Page 2 of Form N-318A is Individual
                   A's name and SSN;
              ♦ Reported on Line 1 is the name of SPE A, LLC;
              ♦ Reported on Line 2 is the $20,000 cash investment by Individual A,
                   LLC in SPE A, LLC;
              ♦ Reported on Line 3 is Individual A's expected distributive/allocated
                   share of credit for each of tax years 2004, 2005, 2006, 2007, and 2008.
              Individual B:
              ♦ Reported in the top portion of Page 2 of Form N-318A is Individual
                   B's name and SSN;
              ♦ Reported on Line 1 is the name of SPE A, LLC;
              ♦ Reported on Line 2 is $30,000 cash investment by Individual B;
              ♦ Reported on Line 3 is Individual B's expected distributive/allocated
                   share of credit for each of tax years 2004, 2005, 2006, 2007, and 2008.

         Finding that Form N-318A is properly completed, the Department sends two certificates
to SPE A, LLC at the mailing address listed on the face of Form N-318A. SPE A, LLC provides
to Individuals A and B their certificates. At the time of filing its tax return, SPE A, LLC attaches
its certificate (which was obtained via the QHTB) and Form N-318 to its tax return.

       Since SPE A, LLC obtained the certificates on behalf of Individuals A and B, the filing of
Form N-318A will not be required from each of Individuals A and B. On or before October 20,
2005, Individuals A and B must attach to their income tax returns their certificates and Form N-
318 in order to claim the credit.

        Please note that Individual A's and Individual B's distributive/allocated shares of the
credit for the 2004 calendar year shall not exceed $14,000 (35% of the $40,000 invested in the
QHTB) with respect to the $50,000 cash contributions. Of the aggregate $50,000 cash
contributed by Individuals A and B, only $40,000 was contributed to the QHTB and thus only
$40,000 was invested in the QHTB in calendar year 2004.
Department of Taxation Announcement No. 2005-xx
February xx, 2005
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         B. Form N-319A, Certified Statement of Research and Development Costs Incurred by a
            Qualified High Technology Business and Claim of the Tax Credit for Research
            Activities

       Every QHTB claiming the tax credit for research activities (credit) must attach Part II of
Form N-319A that has been signed by the Department of Taxation (the certificate) to the Hawaii
income tax return as a prerequisite to claim the credit. If the QHTB is a partnership for income
tax purposes, both the QHTB and the partners of the QHTB must attach the certificates to their
Hawaii income tax return as a prerequisite to claim the credit.

         To obtain the certificate, Part I of Form N-319A must be completed, signed, and
submitted by an authorized person of the QHTB to the Department before March 31st of each
year if the income tax return is filed a calendar year basis. For fiscal year filers, the due date is
before the last day of the third month following the close of the fiscal year.

       At the time Form N-319A is submitted, a "best estimate" is acceptable if the actual
amounts or final numbers are not available. If Form N-319A was completed based upon a "best
estimate," a revised and/or amended Form N-319A will not generally be required.8

        If Form N-319A is properly completed, the Department will send the certificate to the
QHTB at the mailing address listed on the face of Form N-319A. If the QHTB is a partnership
for income tax purposes, the QHTB will send to its partners their certificates and its partners
must attach their certificates behind Form N-319 at the time the income tax returns are filed with
the Department. The QHTB must attach the certificate behind Form N-319 at the time its
income tax return is filed with the Department.

         Example 2:

         In the calendar year 2004, QHTB incurs qualified research expenses that are attributable
to its research activity conducted in Hawaii. QHTB is a calendar year filer and C-corporation for
income tax purposes. The requirements in §§ 235-2.3(b)(1) and 235-110.91, HRS, and Internal
Revenue Code § 41 and the Treasury Regulations thereunder have been met with respect to the
qualified research expenses. Before March 31, 2005, the QHTB sends to the Department a
properly completed and signed Form N-319A reporting the breakdown of its qualified research
expenses, the amount of qualified research expenses incurred from July 1, 2004 to December 31,
2004, and the amount of credit it expects to claim and to take for the calendar year 2004 with
respect to the expenses/costs incurred for the entire year and for the period of July 1, 2004
through December 31, 2004.

         For the calendar year 2004, QHTB has up to October 20, 2005 to file their income tax


8 If the Department finds that the "best estimate" is not acceptable, the QHTB will be notified by the Department of any required
amended Form N-319A.
Department of Taxation Announcement No. 2005-xx
February xx, 2005
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returns (extension application was timely filed and accepted).

       Finding that Form N-319A is properly completed, the Department sends the certificate to
the QHTB at the mailing address listed on the face of Form N-319A. On or before October 20,
2005, QHTB attaches Form N-319 and the certificate to its completed and signed Form N-30,
Corporation Income Tax Return.

       Example 3:

         In the calendar year 2004, QHTB incurs qualified research expenses that are attributable
to its research activity conducted in Hawaii. QHTB is a calendar year filer and partnership for
income tax purposes. The requirements in §§ 235-2.3(b)(1) and 235-110.91, HRS, and Internal
Revenue Code § 41 and the Treasury Regulations thereunder have been met with respect to the
qualified research expenses. Before March 31, 2005, the QHTB sends to the Department the
completed and signed Form N-319A:

       •   Reported in Part I of Form N-319A is the breakdown of its qualified research
           expenses;
       •   Reported in Part I of Form N-319A is the amount of qualified research expenses
           incurred from July 1, 2004 to December 31, 2004;
       •   Reported in Part I of Form N-319A is the amount of credit it expects to
           claim/allocate/distribute for the entire year and for the period of July 1, 2004 through
           December 31;
       •   Attached to Form N-319A is a hard and soft copy (3.5" floppy disk or CD) of the
           worksheet listing each partner's (a) name, tax identification number, and mailing
           address and (b) expected distributive/allocated share of the credit;
       •    A completed Part II for the QHTB and each partner.

         For the 2004 calendar year, QHTB and its partners/members has up to October 20, 2005
to file their income tax returns (extension applications were timely filed and accepted).

        Finding that Form N-319A is properly completed, the Department sends the certificates to
QHTB at the mailing address listed on the face of Form N-319A. QHTB provides to its partners
their certificates. On or before October 20, 2005, the QHTB and its partners must each attach to
their income tax returns the certificates and Form N-319 in order to claim the credit.
Department of Taxation Announcement No. 2005-xx
February xx, 2005
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       Filing Address for Forms N-318A and N-319A

       Forms N-318A and N-319A are to be mailed to the following address:

       Rules Office
       Department of Taxation
       P.O. Box 259
       Honolulu, HI 96809-0259


      Please allow ten (10) business days from the date documents are received for the
Department of Taxation’s certification.

         Hawaii tax forms and information are available on the Department's website at:
www.state.hi.us/tax. If you know which Hawaii tax form or publication is needed, please call the
Department's request line at 808-587-7572 or toll-free from the neighbor islands and continental
U.S. at 1-800-222-7572. This service is available 24 hours a day, 7 days a week. Additional
information is available by calling the Tax Service Branch during business hours at 587-4242 or
toll-free at 1-800-222-3229, or by e-mailing them at Taxpayer.Services@hawaii.gov.




                                                    KURT KAWAFUCHI
                                                    Director of Taxation




HRS Section Explained: HRS §§ 235-110.9 and 235-110.91