Month: December 2019

What Made It Through the 2019 Session

Legislative Update: What Made It Through the 2019 Session

Here are some of the bills that crossed the finish line for this session. We also mention a couple that got caught by the business end of the Governor’s veto pen.
 

Vetoed Bills

REITs Dodge the Bullet Again
Real estate investment trusts, under federal law, are certain corporations that invest in real estate. They pay no corporate income tax, but their shareholders are supposed to pay tax on the dividends. This, however, doesn’t happen if the tax involved is state tax and the REIT shareholder lives out of state. In that case, the REIT does business and makes money here, the company doesn’t pay income tax, and the shareholders pay income tax to their home states. Some folks saw this as a tax loophole and urged passage of SB 301, a fix in the law that would make the REITs taxable here like any other corporation. The Governor thought there was too much risk that investments into Hawaii would dry up as a result.
 
SB 301 Status: VETO
 
Want to Collect Tax for Transient Vacation Rentals? No Dice
SB 1292 would have required large transient accommodations brokers, and permits all other transient accommodations brokers, to register as tax collection agents to collect and remit general excise and transient accommodations taxes on behalf of operators and plan managers using their services. Seems like a straightforward withholding tax bill? Not so to the counties, who are trying (so they say) to enforce their zoning laws that in some instances prohibit or restrict transient rentals. The bill collects the tax for the State (note that the tax is due whether the business is legal or not) but does not provide for information sharing with the counties. The counties argued, and apparently the Governor agreed, that signing the bill would be tantamount to the State condoning illegal activity.
 
SB 1292 Status: VETO
 
What follows is a selection of bills that have become law. They are presented in no special order.
 
Online Sellers Beware! We’re Going After You…for Income Tax!
Under U.S. constitutional law, a certain amount of connection between a potential taxpayer and a State is needed before the State has power to impose tax. South Dakota v. Wayfair Corp., 138 S. Ct. 2080 (2018), upheld a South Dakota law saying that nexus is established for sales tax purposes with $100,000 in sales or 200 separate transactions. We passed a similar law last year, applying it to our General Excise Tax with lightning speed. Act 41, SLH 2018 (HRS § 237-2.5). Why stop at sales tax? This year’s SB 495 applies the same standard to establish nexus for income tax. The tax press says Hawaii is the first state to do this.
 
SB 495 Status: Act 221, SLH 2019
 
And Let’s Not Forget Marketplace Facilitators!
The bill discussed immediately above establishes the responsibility of an online seller to pay tax. But what if the online seller is selling someone else’s product, and that someone is out of state? SB 396 addresses the issue. Under this bill, the online seller acting on behalf of someone else is a marketplace facilitator, and the facilitator is considered the retailer in the transaction and must pay the GET. If the facilitator takes or processes product orders but doesn’t handle the money, the facilitator must submit a detailed report to the Department about who sold what to whom and for how much.
 
SB 396 Status: Act 2, SLH 2019
 
Conformity to the IRC, With a Break for Nonprofits
Hawaii income tax law usually conforms to much of the federal Internal Revenue Code. That normally helps both the taxpayer and the State. The taxpayer doesn’t have to do tax returns two radically different ways, and the State can easily piggyback on an IRS audit when the IRC and state law are similar. Last year, the State refused to conform to a TrumpTax provision denying business deductions for employee parking expenses but forgot to snuff out a similar provision requiring nonprofits to pay tax when they provide employee parking benefits. This year’s bill, SB 1130, fixes that effective for taxable years beginning in 2019. The bill also clarifies the Hawaii applicable exclusion amount for estate tax and conforms to federal provisions relating to Qualified Opportunity Zones (at least the ones located in Hawaii).
 
SB 1130 Status: Act 69, SLH 2019
 
So, What Really Is a Resort Fee?
Hotels both here and in other states and countries have been charging their guests “resort fees.” A resort fee is supposed to be a payment for amenities provided to guests of the hotel. But some hotels made it so difficult to decline the fee that tax authorities, including ours, concluded that such a fee could be a disguised part of the room rate, which in Hawaii is subject to the Transient Accommodations Tax (TAT), a 10.25% tax on transient accommodation rentals. Last year, the Legislature concluded that the State was getting shorted because it wasn’t getting the appropriate taxes on resort fees. It passed a bill to fix the issue but ran into problems by saying that EVERYTHING charged to a tourist is a resort fee. The bill was vetoed. This year, SB 380 clarifies that “mandatory” resort fees are subject to the TAT, effective July 1st. The Department recently posted a Tax Information Release announcing proposed rules to define what a mandatory resort fee is.
 
SB 380 Status: Act 20, SLH 2019
 
You Show Me a K-1, I’ll Show You a Withholding Obligation
Currently, S corporations doing business in Hawaii have an obligation to withhold Hawaii income tax on distributive shares of income credited to their nonresident shareholders-unless the shareholders file documentation obligating themselves to file Hawaii tax returns and to pay tax on those earnings. SB 1360 applies a similar withholding obligation to nonresidents who receive a Schedule K-1 showing passthrough income from partnerships or trusts. The bill took effect in 2019, but the Department of Taxation tells us they aren’t ready to enforce it. Department of Taxation Announcement 2019-08says that the “Department intends on requiring withholding under Act 232 no sooner than taxable years beginning after December 31, 2019.” So, don’t worry about it for this year.
 
SB 1360 Status: Act 232, SLH 2019
 
It’s Now Even More Expensive to Die Here
One of the most straightforward bills, and one of the earliest to be signed into law, was SB 1361, which adds a new 20% tax bracket for taxable estates over $10 million. This ties us with Washington state as the state imposing the highest estate tax rate. Note that we are talking about a Hawaii taxable estate over $10 million, not a Federal taxable estate over $10 million; Hawaii has a unified credit of only $5.49 million.
 
SB 1361 Status: Act 3, SLH 2019
 
Inching Up Support for Lights, Camera, and Action
Hawaii now provides a movie, television, and digital media production credit for productions that shoot here and help our local economy and talent pipelines. The credit was limited by a $35 million statewide limit. Some were concerned that with Hawaii Five-0 and Magnum, P.I. shooting here now, there wouldn’t be enough left in the $35 million to accommodate a feature film as well (think “Pirates of the Caribbean,” “Jurassic Park”), and wanted the statewide cap lifted entirely. SB 33, apparently a compromise deal, hoisted the cap to $50 million.
 
SB 33 Status: Act 275, SLH 2019
 
Dust Off Those Ancient Houses!
The Legislature established in SB 1394 a new tax credit that would provide a 30% tax credit for expenses to substantially rehabilitate a certified historic structure. Don’t worry about this one breaking the bank, however; payout of this credit is limited to $1 million statewide.
 
SB 1394 Status: Act 267, SLH 2019
 
Shades of Act 221-the Research Credit Has Returned!
Those of us who’ve been around the block a few times may remember Act 221 of 2001, a series of incentives for high tech development here in Hawaii that helped to develop the industry immensely, but at great cost to the state treasury. One of the incentives enacted back then was a souped-up version of the federal credit for increased research activities, known as Section 41. While the federal credit was based on an increase in research spending from one year to the next, the Hawaii credit was based on pure spending, if it was in Hawaii. In 2013, our lawmakers changed the Hawaii credit to one mirroring the federal credit. In SB 1314, we bring back the Act 221 version of the research credit. Key additions include shifting certification responsibility to DBEDT instead of DOTAX, and an annual aggregate cap of $5 million. This law sunsets at the end of 2024.
 
SB 1394 Status: Act 261, SLH 2019
 
Can’t Tax Tourist Rental Cars Only? Then Whack Everyone
In 2018, Act 215 enacted a surcharge on car rentals for those who didn’t have Hawaii drivers’ licenses. Thus, the tax was $5 per day on “tourists” and $3 per day on “locals.” This year, someone figured out that the surcharge was unconstitutional because it discriminated against interstate commerce. (It’s okay to give a “kamaaina discount” but you can’t do that if you’re a government.) With SB 162, the discrimination is cured-everyone pays the $5, effective July 1st.
 
SB 162 Status: Act 174, SLH 2019
 

 

Last Minute Tax Opportunities for 2019

There are only a few days left to go before the year ends, but here are some actions you may take before the end of the year to improve your 2019 tax position.  (Courtesy of Thomson Reuters/Tax & Accounting, with some editorial comments by me.) 

Increase 2019 itemized deductions via a “bunching strategy.”  Many taxpayers who claimed itemized deductions in prior years will no longer be able to do so. That’s because the standard deduction has been increased and many itemized deductions have been cut back or abolished. Paying some otherwise-deductible-in-2020 itemized deductions in 2019 can decrease taxable income in 2019 and will not increase 2020 taxable income if 2020 itemized deductions would otherwise have still been less than the 2020 standard deduction. For example, a taxpayer who expects to itemize deductions in 2019 but not 2020, and usually contributes a total of $1,500 to charities each year, should consider making a total of $3,000 of charitable contributions before the end of 2019 (and skipping charitable contributions in 2020). 

(Editor’s Note:  Compared with the Federal standard deduction of $12,200 for single and $24,400 for joint filers, the Hawaii standard deduction is much lower — $2,200 for single or $4,400 for joint, for example — so most folks should itemize for Hawaii income tax anyway.)

Have an extra amount of withholding in order to solve an underpayment of estimated tax problem. Employees may discover that their prepayments of tax for 2019 have been too small because, for example, their estimate of income or deductions was off and they are underwithheld, or they failed to make estimated tax payments for unanticipated income, such as gains from sales of stock. Or they may be facing a penalty for underpayment of estimated tax because of the additional 0.9% Medicare tax and/or the 3.8% surtax on unearned income. To ward off or reduce an estimated tax underpayment penalty, employees can ask their employers to increase withholding for their last paycheck or paychecks to make up or reduce the deficiency. Employees can file a new Form W-4 or simply request that the employer withhold a flat amount of additional income tax. Increasing the final estimated tax payment for 2019 (due on Jan. 15, 2020) can cut or eliminate the penalty for a final-quarter underpayment only. It doesn’t help with underpayments for preceding quarters. By contrast, tax withheld on wages can wipe out or reduce underpayments for previous quarters because, as a general rule, an equal part of the total withholding during the year is treated as having been paid on each quarterly estimated payment date.

Take a retirement plan distribution in order to solve an underpayment of estimated tax problem. An individual can take an eligible rollover distribution from a qualified retirement plan before the end of 2019 if he or she is facing a penalty for underpayment of estimated tax and the extra withholding option described above is unavailable or won’t sufficiently address the problem. Unless the taxpayer chooses no withholding, the withholding rate for a nonperiodic distribution (a payment other than a periodic payment) that is not an eligible rollover distribution is 10% of the distribution. The taxpayer can also ask the payer to withhold an additional amount using Form W-4P. The taxpayer can then timely roll over the gross amount of the distribution, as increased by the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2019, but the withheld tax will be applied pro rata over the full 2019 tax year to reduce previous underpayments of estimated tax. 

Be sure to take required minimum distributions (RMDs). Taxpayers who have reached age 70-½ by Dec. 31, 2019 should be sure to take their 2019 RMD from their IRAs or 401(k) plans (or other employer-sponsored retired plans). Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. Those who turned age 70-½ in 2019 can delay the first required distribution to 2020. However, taxpayers who take the deferral route will have to take a double distribution in 2020-the amount required for 2019 plus the amount required for 2019. This strategy could make sense if the taxpayer will be subject to a lower tax rate next year. 

Caution.  Section 114 of the SECURE Act (P.L. 116-94), that was signed into law on December 20, changes the required beginning date for minimum distributions from a rule based on the calendar year in which the taxpayer attains age 70 1/2 to a rule based on the calendar year in which the taxpayer attains age 72. However, this law change is effective for distributions required to be made after Dec. 31, 2019, with respect to individuals who attain age 70-1/2 after that date. Thus, the change will not affect year-end 2019 planning.

(Editor’s Note:  We’ll be following up with further posts describing the changes made by the SECURE Act.)

Establish a Keogh plan.  A self-employed person who wants to contribute to a Keogh plan for 2019 must establish that plan before the end of 2019. If that is done, deductible contributions for 2019 can be made as late as the taxpayer’s extended tax return due date for 2019.

Use IRAs to make charitable gifts. Taxpayers who have reached age 70-½ by the end of 2019, own IRAs, and are thinking of making a charitable gift should consider arranging for the gift to be made by way of a qualified charitable contribution, or QCD-a direct transfer from the IRA trustee to the charitable organization. Such a transfer (not to exceed $100,000) will neither be included in gross income nor allowed as a deduction on the taxpayer’s return. But, since such a distribution is not includible in gross income, it will not increase AGI for purposes of the phaseout of any deduction, exclusion, or tax credit that is limited or lost completely when AGI reaches certain specified level.

A qualified charitable contribution before year end is a particularly good idea for retired taxpayers who don’t need all of their as-yet undistributed RMD for living expenses. That’s because a charitable contribution distribution reduces the amount of the RMD that must be withdrawn, resulting in tax savings.

Observation.  The SECURE Act change noted in the Caution above has no effect on this rule. That is, the rule continues to apply to taxpayers who have reached age 70-1/2 by the end of the tax year.

Make year-end gifts. A person can give any other person up to $15,000 for 2019 without incurring any gift tax. The annual exclusion amount increases to $30,000 per donee if the donor’s spouse consents to gift-splitting. Anyone who expects eventually to have estate tax liability and who can afford to make gifts to family members should do so. Besides avoiding transfer tax, annual exclusion gifts take future appreciation in the value of the gift property out of the donor’s estate, and they shift the income tax obligation on the property’s earnings to the donee who may be in a lower tax bracket (if not subject to the kiddie tax).

A gift by check to a noncharitable donee is considered to be a completed gift for gift and estate tax purposes on the earlier of:

  1. the date on which the donor has so parted with dominion and control under local law so as to leave the donor with no power to change its disposition, or
  2. the date on which the donee deposits the check (or cashes it against available funds of the donee) or presents the check for payment, if it is established that:

… the check was paid by the drawee bank when first presented to the drawee bank for payment;

… the donor intended to make a gift;

… the donor was alive when the check was paid by the drawee bank;

… delivery of the check by the donor was unconditional; and

… the check was deposited, cashed, or presented in the calendar year for which completed gift treatment is sought and within a reasonable time of issuance.

Thus, for example, a $15,000 gift check given to and deposited by a grandson on Dec. 31, 2019 is treated as a completed gift for 2019 even though the check doesn’t clear until 2020 (assuming the donor is still alive when the check is paid by the drawee bank).

Watch out for the use-it-or-lose-it rule. Unused cafeteria plan amounts left over at the end of a plan year must generally be forfeited (use-it-or-lose-it rule). A cafeteria plan can provide an optional grace period immediately following the end of each plan year, extending the period for incurring expenses for qualified benefits to the 15th day of the third month after the end of the plan year. Benefits or contributions not used as of the end of the grace period are forfeited. Under an exception to the use-it-or-lose-it rule, at the plan sponsor’s option and in lieu of any grace period, employees may be allowed to carry over up to $500 of unused amounts remaining at year-end in a health flexible spending account.

Taxpayers thus should make sure they understand their employer’s plan and should make last-minute purchases before year end to the extent that not doing so will result in losing benefits. In most cases, a trip to the drug store, dentist or optometrist, for goods or services that the taxpayer would otherwise have purchased in 2020, can avoid “losing it.”

Paying by credit card creates deduction on date of credit card transaction.  Taxpayers should consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase their 2019 deductions even if they don’t pay their credit card bill until after the end of the year.

(Editor’s note:  The following is for non-U.S. individuals only.)  Renew ITINs that expire on Dec. 31.  Any individual filing a U.S. tax return is required to state his or her taxpayer identification number on that return. Generally, a taxpayer identification number is the individual’s Social Security number (SSN). However, IRS issues Individual Taxpayer Identification Numbers (ITINs) to individuals who are not eligible to be issued an SSN but who still have a U.S. tax filing obligation.

Unlike SSNs, ITINs expire if not used on a return for three consecutive years or after a certain period. For example, ITINs issued in 2011 and 2012 (i.e., those with middle digits 83, 84, 85, 86, and 87) will expire on December 31, 2019.

Anyone whose ITIN is expiring at the end of 2019 needs to file a complete renewal application, Form W-7, Application for IRS Individual Taxpayer Identification Number.