Legislative Update: Donovan’s Dozen!

Recently, an alert and concerned reporter, when visiting the offices of Senate Ways and Means Committee Chair Donovan Dela Cruz, spotted a whiteboard with 14 bill numbers written on it.  All of the bills are supposed to be revenue raisers, so we thought it important to share them.  (Yes, I know that a “dozen” is 12, but two of them were already dead when we got the list, and Donovan’s Fourteen doesn’t sound catchy.  That’s my story, and I am sticking to it.)

So here they are, in order of bill number:

Closing the REIT Loophole?  Real Estate Investment Trusts, or REITs, are allowed under federal tax law to pay no tax at the corporate level if they distribute their net earnings to their shareholders as dividends.  The Feds receive one layer of federal tax.  Our state generally conforms to the REIT law, but we tend to miss out because the REIT doesn’t pay state income tax and its shareholders are taxed on their dividends where they live, which generally isn’t in Hawaii.  SB 301 proposes to fix this by treating REITs as regular corporations.  Proponents say it closes a giant loophole.  Opponents note that REITs have invested lots of money in Hawaii and passing an extra tax will cause them to pack up and leave.

Resort Fees as a Price of Lodging?  Many resorts in the U.S. and other countries charge “resort fees” as the price of hotel amenities and services.  Our Tax Department has taken the position that if the fees are mandatory for a guest staying the night, they are part of the room rate and subject to 10.25% Transient Accommodations Tax.  SB 380 proposes to write into law that mandatory resort fees are subject to TAT.  A similar bill passed last year without the word “mandatory,” meaning that meals, Internet service fees, in-room movies, and similar items would be subject to TAT.  The Governor vetoed last year’s bill.

We Don’t Like the Timeshare Tax Formula, So Let’s Double It!  TAT applies as well to timeshare owners occupying their own units.  Because there is no room rate, it applies to half the average daily maintenance fee for a week.  The Department is saying this amount is grossly inadequate, but it apparently never made use of a procedure in existing law to challenge the formula.  SB 382, instead, applies the tax to 100% of the average daily maintenance fee.  (This measure is dead, but its substance may appear in other bills.)

All Aboard for Single Sales Factor!  When businesses operate in many states, it’s always a challenge to figure out how much business is taxable by each state.  Most states take a weighted average of the property factor (how much property is in the state divided by how much property is everywhere), payroll factor, and sales factor and multiply it by net income from everywhere to yield net income taxable in the state.  The classic formula, which Hawaii now has, is an equally weighted average.  Most states have upweighted the sales factor, and 31 states ignore the other two factors, at least for some classes of taxpayers.  The basic idea is that the formula would favor those who export.  SB 394 would have Hawaii join the 31 states.

Conveyance Tax on Short Commercial Leases:  Hawaii imposes conveyance tax when real property is sold or leased and the deed or lease is then recorded.  We presently exempt leases of less than five years from the tax, although leases for more than one year need to be recorded.  SB 395 would restrict the exemption to residential leases one year or less and would repeal the exemption altogether for commercial property.  For leases the tax is applied to the present value of rent payable under the lease, capitalized at 6%.

We Got Online Sellers, Now Let’s Go for Their Marketplaces:  Previously, online sellers could offer products to Hawaii customers without paying Hawaii tax.  That gave them an advantage over local stores.  Last year, following a state-friendly U.S. Supreme Court ruling, our state adopted a law requiring many of those businesses to register and pay general excise tax.  The businesses then said they would pay tax on their own sales but wouldn’t if they were merely representing sellers didn’t have to pay tax to Hawaii.  SB 396 solves that problem by taxing the marketplace provider as if it sold the product directly.  This bill already has been sent to the Governor’s desk.

And Let’s Not Forget Income Tax:  When our state adopted the law last year on the heels of the favorable Supreme Court decision, as described in the previous paragraph, the law applied to general excise tax only.  SB 495 would create a similar law that applies to income tax.  But wait – we have other tax types too, such as Franchise, Public Service Company, or Transient Accommodations, so what are we going to do about them?

You Foreign? You Withhold!  When a nonresident sells real estate in Hawaii, our laws require withholding of 7.25% of the gross price.  That way, it’s less likely that the owner would be able to skip town without paying state taxes, such as income tax on capital gains.  Under current law, entities, such as corporations and partnerships, are exempt from withholding if they register with our DCCA even though they might have been formed in another state.  SB 712 subjects foreign entities to this withholding scheme whether they registered with DCCA or not. 

Online Travel Companies Beware, We’ll Get Our TAT Yet!  Suppose an online travel company (OTC) sells a hotel room to a tourist for $150 a night and pays the local hotel $120.  The hotel pays TAT on the $120.  After years of litigation, the Hawaii Supreme Court ruled that the OTC doesn’t pay TAT on the $30 because it’s not a hotel or a hotel operator.  SB 714 would require the OTC to pay TAT on the $30.  It also contains the substance of SB 380 and SB 382, previously discussed.  (This measure is dead, but its substance may appear in other bills.)

The “AirBnB Bill” Returns Yet Again:  This bill is about “transient vacation rentals,” from bed and breakfast establishments to people just wanting to rent out a room in their house for a little extra money to help make ends meet.  Those who do so are confronted with state laws imposing GET and TAT on the proceeds, and county zoning laws that often forbid TVR use in residential properties altogether.  A bill passed in 2016 proposed to allow TVR platforms such as AirBnB and Flipkey to collect and pay over the state taxes, but the bill was vetoed because of county objections.  This incarnation of the bill, SB 1292, would require the platforms to collect and pay over the tax and provides a citation process with monetary fines for hosts who do not register.

Do we Really Trust Foreigners to Pay Tax?  Currently, we don’t tax Subchapter S corporations, but we do tax their shareholders.  To ensure that non-Hawaii shareholders pay appropriate business taxes, we ask that they file a statement that they will file Hawaii returns and pay taxes.  If they don’t, we withhold Hawaii tax at the company level.  SB 1360 applies the same concept to partnerships, estates, and trusts, except we don’t give the out-of-state partners and beneficiaries the option.  We will just withhold.

When the Certainties in Life — Death and Taxes — Happen at the Same Time:  SB 1361 hikes the maximum estate tax rate to 20%, which would be tied for the highest state estate tax rate in the country.  The rate would kick in for taxable estates over $10 million.  This bill already has been sent to the Governor’s desk.

Jacking Up Conveyance Taxes Again:  Conveyance tax is imposed whenever Hawaii real estate is sold or leased.  SB 1362 proposes to hoist the tax on a condominium or single-family residence for which the owner is not eligible for a county homeowners’ exemption.  For properties $2 to $4 million, the tax would go from 0.6% to 1%, an increase of 67%.  For properties $4 to $6 million, the tax would go from 0.85% to 2%, an increase of 135%.  For properties $6 to $10 million, the tax would go from 1.1% to 3%, an increase of 172%.  For properties $10 million or more, the tax would go from 1.25% to 4%, an increase of 220%. 

A Half Penny for the Keiki!  We’ve written about this before.  SB 1474 proposes a 0.5 percentage point increase in the GET in order to raise $200 million or so for K-12 schools and $50 million for the University of Hawaii.  The bill has crossed over from the Senate, but Finance Chair Sylvia Luke has been quoted as saying that the bill won’t get a hearing in the House.  This bill is probably dead.

ABA Sales & Use Tax Deskbook — Cyber Monday Deal!

On Monday, November 26, the American Bar Association (ABA) will offer a Cyber Monday promotion of 40% off + free shipping.

One of the works being offered is the “ABA Sales & Use Tax Deskbook.”  I’m co-author of the Hawaii chapter.

If you’re interested, head to https://www.americanbar.org/products/inv/book/345782509/.


Winners and Losers in the 2018 Legislative Session

Legislative Update:  Winners and Losers of the 2018 Session

We’ll now go through some of the losers, the bills that are now dead, and the winners, which have been sent up to the Governor’s office for approval or veto.

Some Bills Dead for This Session

HB 207 Status:  Dead (Estate and Conveyance Tax Hikes)

HB 1718 Status:  Dead (Nonrefundable Credit for Child Care Costs)

HB 2007 Status:  Dead (GET Exemption for Service and Maintenance Facilities for Non-Jet Aircraft)

HB 2462 Status:  Dead (GET Exemption for Sales of Farm Equipment and Machinery to Producers)

HB 2605 Status:  Dead (“AirBnB Bill” to Allow Withholding Tax on Transient Vacation Rentals)

HB 2702 Status:  Dead (Tax on Real Estate Investment Trusts)

SB 2100 Status:  Dead (Expand Solar Credit to Include Battery Backup Systems)

SB 2890 Status:  Dead (GET Applied to “Marketplace Providers”)

SB 2905 Status:  Dead (Credit for On-Site Early Childhood Facilities)

SB 2910 Status:  Dead (Loan Green Infrastructure Fund $ to State Agencies at 3.5%)

TrumpTax Is Alive and Well, but Hawaii Is Stuck in 2017

For the last sixty years, the Hawaii income tax law has conformed, to a great degree, to 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.  SB 2821, however, refuses to conform in several key areas, most of which affect individual tax.  The federal amendments limit itemized deductions, such as state and local tax, mortgage interest, and miscellaneous itemized deductions (those deductible if they exceed 2% of AGI).  The state bill provides that those federal amendments don’t apply.  The state bill also decouples from bonus depreciation and section 179 changes, key elements in the federal code.  The state standard deduction, personal exemption, and all tax rates are unchanged.  Business tax changes, including disallowance of a writeoff for entertainment expenses, are adopted.  The federal estate and generation-skipping tax changes similarly are not adopted; the Hawaii estate tax kicks in using the federal limits in place for 2017.
SB 2821 Status:  ACT 27

HARPTA!  Bless You!  A Cure for the Wrong Disease?

The Hawaii Real Property Tax Act, or HARPTA for short, provides that when a nonresident person or company sells Hawaii real property, 5% of the gross price is withheld to pay possible tax liabilities, such as income tax on capital gains.  SB 508 changes the withholding percentage to 7.25%, the same as the top capital gains rate.  The Senate wanted the rate even higher, at 9%, perhaps on the theory that some of these properties are rented and the GET and TAT on the rentals can be collected from the withheld income tax.

SB 508 Status:  ACT 122

The Bob Nakata Act

The Rev. Bob Nakata has devoted 20 years of his life to issues surrounding homelessness and affordable housing in Hawaii, including tirelessly prowling the Capitol halls this year lobbying for affordable housing bills.  HB 2748, dubbed the “Bob Nakata Act,” adds $200 million to the Rental Housing Trust Fund, puts $10 million into the Dwelling Unit Revolving Fund, and expands and extends the GET exemption for construction of affordable units.

HB 2748 Status:  ACT 39

You Can’t See It or Touch It, But We Can Tax It!

To protect our local business people, Hawaii has a Use Tax.  A buyer has a choice between buying from someone who is subject to General Excise Tax (a local store, perhaps) and someone who is outside our taxing jurisdiction (an online seller, perhaps).  If the buyer chooses to buy from the latter, the buyer needs to pay Use Tax, generally the same as the GET that would have been levied on the local seller.  We already have extended the Use Tax beyond purchases of tangible goods, so that it also applies to the import of services and contracting.  HB 2416 broadens the Use Tax to apply to the value of intangible property imported or used in the State, while exempting the sale of intangible property exported or used outside the State.  The bill exempts stocks and other securities, bonds and other evidence of debt, commodity futures and similar options and rights, interests in land, or dividends.  Still, the trouble is in the details.  Intangible property isn’t like a mango that stays put, so figuring out whether it’s been imported will be a challenge.  And then, are we ready for the results?

HB 2416 STATUS:  ACT 183

Class, Your Assignment Is to Fix Our Unreasonably Low Real Property Taxes, and Not Tell the Pesky Money Chairs!

Hawaii has the lowest real property tax in the nation.  Many see that as a good thing; the teachers’ union sees it as an opportunity to slap a surcharge on that tax to Help Our Keiki.  Because our state constitution now gives all the real property tax to the counties, constitutional changes are needed before such a bill can take effect.  SB 2922 puts the question on the ballot for voters in 2018.  The voters only will be asked to give the Legislature the power to impose the tax, so the implementing legislation, which would define what is subject to the surcharge as well as the amount of the surcharge, can be changed at any time.  Furthermore, there is no guarantee that any of the new tax will find its way into the classroom.  Why?  The State now appropriates almost $2 billion in General Fund money to the Department of Education.  While the constitutional amendment earmarks the new tax for education, there is nothing to prevent the existing $2 billion from being “repurposed.”  Interestingly, the legislation in both the Senate and the House bypassed the respective money committees entirely.  In the Senate, it was heard by Education and Judiciary, while the House referred it only to Education.

SB 2922 Status:  To Ballot

Special Fund Housekeeping Bill Transforms into Money Grab, Then Returns to Normal

HB 1652 started out as a housekeeping bill, to get rid of some special funds that weren’t being used, following a State Auditor’s report identifying those funds.  But then the Senate did two things.  First, it added “auto-raid” provisions placing new dollar caps on fourteen different special funds, so that if the special fund has more money at the end of the State fiscal year the excess is dropped into the state general fund.  Then, it added a provision that increases by 40% the “central services skim,” a fee that the State sucks out of most special funds and plops into the general fund, ostensibly for services that the State provides to the fund (although the skim may exceed by far the cost of those services).  The Conference Committee returned the bill to its original mild-mannered form.

HB 1652 Status:  ACT 164

Let’s Apply 14% Tax to Everything on a Hotel Bill!

A “resort fee,” which also goes on your bill if you stay at a hotel not only in Hawaii but also in many locations in the mainland U.S., Mexico, and the Caribbean, is to pay not for basic lodging, but for amenities such as use of the hotel’s weight room, or pool, or Wi-Fi internet service.  But some think that it’s in substance part of the room charge, so that the Transient Accommodations Tax at 10.25% needs to be imposed on top of the GET at 4% or 4.5%.  The Department has been distinguishing room charges from fees subject only to the GET by asking whether the fees are mandatory for a guest staying at the hotel.  SB 2699, however, reacts to the issue by making all resort fees subject to TAT whether they are mandatory or not, and by defining a “resort fee” as “any charge or surcharge imposed by an operator, owner, or representative thereof to a transient for the use of the transient accommodation’s property, services, or amenities.”  This could mean ANYTHING on the guest’s hotel bill, including meal charges, massages, Internet fees, or phone charges.  This certainly was not the intent of the TAT when it was enacted, and it would be far different from most hotel room taxes across the country and internationally if the tax is applied in this manner.

SB 2699 Status:  VETOED

Online Sellers Beware!  We’re Going After You!

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.  Quill Corp v. North Dakota, 504 U.S. 298 (1992), held that some physical presence is needed before substantial nexus can be found.  However, states have been closing in on online sellers who have lots of business in those states, arguing that a sufficient amount of activity will give the state the necessary nexus.  South Dakota took this position and went after one large online seller, and the case, Wayfair Corp. v. South Dakota, has been accepted by the U.S. Supreme Court and may yield a clarifying opinion later this year.  In the meantime, SB 2514 adopts provisions similar to those in South Dakota, saying that nexus is established with $100,000 in sales or 200 separate transactions.

SB 2514 Status:  ACT 41

What Happened at the End of 2017?

The federal tax overhaul passed, and there were other major developments as well.  Please see the below, with content by RIA Checkpoint with occasional commentary from me.
Major tax reform. On December 22, President Trump signed into law the “Tax Cuts and Jobs Act” (P.L. 115-97), a sweeping tax reform law that will entirely change the tax landscape.
This comprehensive tax overhaul dramatically changes the rules governing the taxation of individual taxpayers for tax years beginning before 2026, providing new income tax rates and brackets, increasing the standard deduction, suspending personal deductions, increasing the child tax credit, limiting the state and local tax deduction, and temporarily reducing the medical expense threshold, among many other changes. The legislation also provides a new deduction for non-corporate taxpayers with qualified business income from pass-throughs.
For businesses, the legislation permanently reduces the corporate tax rate to 21%, repeals the corporate alternative minimum tax, imposes new limits on business interest deductions, and makes a number of changes involving expensing and depreciation. The legislation also makes significant changes to the tax treatment of foreign income and taxpayers, including the exemption from U.S. tax for certain foreign income and the deemed repatriation of off-shore income.
[Our Department of Taxation just submitted “conformity bills” to our Legislature that would pick up most of the federal changes for Hawaii purposes.  Reference:  Senate Bill 2821House Bill 2394.]
Regulations issued for electing out of new partnership audit rules. The IRS has issued final regulations on the election out of the centralized partnership audit regime rules, which are generally effective for tax years beginning after Dec. 31, 2017. Under the new audit regime, any adjustment to items of income, gain, loss, deduction, or credit of a partnership for a partnership tax year (and any partner’s distributive share thereof) generally is determined, and any tax attributable thereto is assessed and collected, at the partnership level. The applicability of any penalty, addition to tax, or additional amount which relates to an adjustment to any such item or share is also be determined at the partnership level. However, new regulations provide guidance on how eligible partnerships that are required to furnish 100 or fewer Schedules K-1 (Partner’s Share of Income, Deductions, Credits, etc.) may elect out of this new regime.
Safe harbor methods for nonbusiness casualty losses. The IRS provided safe harbor methods that individual taxpayers may use in determining the amount of their casualty and theft losses for their personal-use residential real property and personal belongings. Taxpayers often have difficulty determining the amount of their losses under the IRS regulations. In order to provide certainty to both taxpayers and the IRS, the safe harbor methods provide easier ways for individuals to measure the decrease in the fair market value of their personal-use residential real property following a casualty and to determine the pre-casualty or theft fair market value of personal belongings. In addition, the IRS provided a safe harbor under which individuals may use one or more cost indexes to determine the amount of loss to their homes as a result of Hurricane and Tropical Storm Harvey, Hurricane Irma and Hurricane Maria.
Deductions denied for house rented to daughter. The Ninth Circuit determined that married taxpayers weren’t entitled to claim business deductions with regard to their second house that they rented to their daughter at below-market rates. During 2008 through 2010, the taxpayers reported rental income from daughter ($24,000 for 2008, $24,000 for 2009, and $6,000 for the first three months of 2010) and claimed deductions relating to the property for, among other things, mortgage interest, taxes, insurance, and depreciation. Overall, they claimed net losses for each year of $134,360, $84,600, and $107,820. The Court determined that the daughter’s use of the house was, in effect, personal use by her parents for purposes of Code Sec. 280A(d)(1)’s limit on deductions with respect to a dwelling unit used for personal purposes. Because she didn’t pay fair market rent, they didn’t qualify for an exception to the general rule in Code Sec. 280A(e) disallowing deductions in excess of rental income. [Seriously.  What were these taxpayers thinking?]
Standard mileage rates increase for 2018.  The optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) increased by 1¢ to 54.5¢ per mile for business travel after 2017. This rate can also be used by employers to provide tax-free reimbursements to employees who supply their own autos for business use, under an accountable plan, and to value personal use of certain low-cost employer-provided vehicles. The rate for using a car to get medical care increased by 1¢ to 18¢ per mile.
Taxpayer was liable for million dollar FBAR penalty. The Ninth Circuit found that a taxpayer wilfully failed to file a Report of Foreign Bank and Foreign Accounts (FBAR) where IRS assessed a penalty of approximately $1.2 million penalty against the taxpayer for failing to disclose her financial interests in an overseas account. The Court rejected a variety of the taxpayer’s arguments, ranging from the contention that the imposition of the penalty violated the U.S. Constitution’s excessive fines, due process, and ex post facto clauses, to assertions that it was barred by statute of limitations or treaty provisions. [IRS 1, Weaselly Taxpayer 0.]

2018 Year-End Planning Tips

Now that the federal tax overhaul has passed, you might want to talk with your tax advisor about doing a few things before year-end (not much time left).

Prepay State Taxes.

Under Trump Tax, individuals only may deduct $10,000 of state and local taxes per year.  For us in Hawaii, that includes state income tax and real property tax.

If you pay more than that in a year, consider paying some taxes in 2017 so they can be deducted under 2017 rules.  Take, for example, the estimated income tax payment due on January 20th.  If you as an individual can pay it by the end of the year, then it can be deducted in 2017 when you might be able to get a bigger benefit from it.

By the way, this won’t work for 2018 taxes that you pay in 2017.

Prepay Miscellaneous Itemized Deductions.

Many of the miscellaneous itemized deductions — the ones that need to be over 2% of adjusted gross income to count — are going away next year.  If you have some of these, you may want to consider prepaying them this year to get a 2017 benefit.

Some of these deductions include:

  • Tax return preparation fees
  • Investment advisory fees
  • Safe deposit box fees
  • Unreimbursed employee business expenses such as job travel, union dues, job education

Charitable Contributions.

Charitable contributions are made by many people, especially in Hawaii.  It’s one of the most popular itemized deductions.  The number of people who itemize is expected to fall sharply because the standard deduction is going up in a big way.  If you think you’ll stop itemizing, you might want to consider making your 2018 contributions by Dec. 31 so you would be able to deduct what you give to charity.

The move makes tax sense only for people who believe they will have enough deductions to itemize on their 2017 return but not when they file 2018 taxes.  So this is not for everyone.

Mortgage Interest.

Mortgage interest will be deductible in 2018, but there will be new limits on the deduction.  Under the new law, you can deduct interest on no more than $750,000 in mortgage debt, down from the current $1.1 million limit.  People who already own homes, or who had a binding written contract to buy one before the law went into effect, still get the higher limit.

As with the charitable contribution deduction, it may make sense to prepay mortgage interest — the payment due at the end of December but that won’t be late if paid in early January, for example.  Prepayment makes tax sense only for people who believe they will have enough deductions to itemize on their 2017 return but not on the 2018 return.

Defer Income Into 2018.

Because tax rates will be lower in 2018, it might make sense for people who can do so to defer some billings into 2018.  Self-employed individuals, for example, who aren’t in a rush to get their cash in the door might send out some year-end billings into 2018.  Generally, individuals are on the cash basis, meaning that their income is considered to be earned not in the year they billing was sent out, but in the year that the payment was received.  Many larger businesses, in contrast, are on the accrual basis, meaning that their income is considered earned when billed.


2017 3Q Federal Developments

The following is a summary of important tax developments that have occurred in the past three months courtesy of Thompson Reuters’ Checkpoint.

President Trump and key lawmakers reveal tax reform plan. The Trump Administration and select members of Congress have released a “unified framework” for tax reform. The document provides more detail than a number of other tax reform documents that have emerged from the Administration over the past few months, but it still leaves many specifics to be worked out by the tax-writing committees (i.e., the House Ways and Means Committee and the Senate Finance Committee).

Plan provisions affecting individuals would:

  • Increase the standard deduction to $24,000 for married taxpayers filing jointly, and $12,000 for single filers;
  • Eliminate the personal exemption and the additional standard deductions for older/blind taxpayers;
  • Reduce the number of tax brackets from seven to three: 12%, 25%, and 35%;
  • Increase the child tax credit;
  • Repeal the individual alternative minimum tax;
  • Largely eliminate itemized deductions, but retain the home mortgage interest and charitable contribution deductions; and
  • Repeal both the estate tax and the generation-skipping transfer tax.

Plan provisions affecting businesses would:

  • Provide a maximum 25% tax rate for “small” and family-owned businesses conducted as sole proprietorships, partnerships and S corporations;
  • Reduce the corporate tax rate to 20% (down from the current top rate of 35%);
  • Provide full expensing for five years;
  • Partially limit the deduction for net interest expense incurred by C corporations;
  • Repeal most deductions and credits, but retain the research and low-income housing credits;
  • Modernize special tax rules that apply to certain industries and sectors;
  • Provide a 100% exemption for dividends from foreign subsidiaries; and
  • To protect the U.S. tax base, tax the foreign profits of U.S. multinational corporations at a reduced rate and on a global basis.

Disaster tax relief legislation. On September 29, President Trump signed into law the “Disaster Tax Relief and Airport and Airway Extension Act of 2017” (P.L. 115-63). The Act provides temporary tax relief to victims of Hurricanes Harvey, Irma, and Maria. Relief for individuals includes, among other things, loosened restrictions for claiming personal casualty losses, tax-favored withdrawals from retirement plans, and the option of using current or prior year’s income for purposes of claiming the earned income and child tax credits. Businesses that qualify for relief may claim a new “employee retention tax credit” of 40% of up to $6,000 of “qualified wages” paid by employers affected by Hurricanes Harvey, Irma, and Maria (for a maximum credit of $2,400 per employee). In addition to the new law, IRS has granted specific administrative hurricane relief, for example, extending various deadlines, encouraging leave-based donation programs for hurricane victims, and allowing retirement plans to make hardship distributions.

Treasury to roll up myRA program. On July 28, the Treasury Department announced that it would begin winding down the myRA (my Retirement Account) program—a type of government-administered Roth IRA initially offered by Treasury beginning in 2014. Noting that demand for and investment in the myRA program had been extremely low, Treasury stated that it would phase out the program over the following months. The myRA program would no longer accept new enrollments, but existing accounts were to remain open and accessible, so that individuals could continue to manage their accounts until further notice. Individuals could make deposits, and their accounts would continue to earn interest. Funds in myRA accounts remained in an investment issued by the Treasury Department.

Simplified per-diem increase for post-Sept. 30, 2017 travel. An employer may pay a per-diem amount to an employee on business-travel status instead of reimbursing actual substantiated expenses for away-from-home lodging, meal and incidental expenses (M&E). If the rate paid doesn’t exceed the IRS-approved maximums, and the employee provides simplified substantiation, the reimbursement isn’t subject to income- or payroll-tax withholding and isn’t reported on the employee’s Form W-2. Instead of using actual per-diems, employers may use a simplified “high-low” per-diem, under which there is one uniform per-diem rate for all “high-cost” areas within the continental U.S. (CONUS), and another per-diem rate for all other areas within CONUS. The IRS released the “high-low” simplified per-diem rates for post-Sept. 30, 2017, travel. Under the optional high-low method for post-Sept. 30, 2017 travel, the high-cost-area per diem is $284 (up from $282), consisting of $216 for lodging and $68 for M&IE. The per-diem for all other localities is $191 (up from $189), consisting of $134 for lodging and $57 for M&IE.

Honest mistake no excuse for incorrectly claimed advance premium tax credit. In what appears to be the first case of its kind—although others are likely to follow—the Tax Court ruled that taxpayers who didn’t qualify for the premium tax credit under the Affordable Care Act (Obamacare) because their modified adjusted gross income exceeded 400% of the federal poverty level had to repay all the advance premium tax credit paid on their behalf to their insurer. A sympathetic Tax Court noted that while their state health insurance Marketplace may have incorrectly informed the taxpayers that they were eligible for the credit for 2014, the Court’s hands were tied by the Code and regs. The simple fact was that the taxpayers’ income exceeded eligible levels and that they had to repay the advance premium tax credit payments.

Safe harbor for financially distressed homeowners extended. The IRS has extended through 2021 guidance on the tax consequences of programs that involve payments made to or on behalf of financially distressed homeowners, including a safe harbor method for computing a homeowner’s deduction for payments made on a home mortgage. For tax years 2010 through 2021, an eligible homeowner (i.e., one who meets the requirements of Code Sec. 163 (dealing with deducting interest) and Code Sec. 164 (dealing with deducting taxes), and participates in a State program in which the program payments could be used to pay interest on the home mortgage) may deduct the lesser of:

  1. The sum of all payments on the home mortgage that the homeowner actually makes during a tax year to the mortgage servicer or the State housing finance agency; or
  2. The sum of amounts shown on Form 1098, Mortgage Interest Statement, for mortgage interest received, real property taxes, and, if deductible for the tax year, mortgage insurance premiums.

(The deduction for mortgage insurance premiums under Code Sec. 163(h)(3)(E) expired at the end of 2016, but it is one of those tax provisions that have been repeatedly extended in the past.)

The IRS also extended penalty relief related to information reporting for mortgage servicers and state housing finance agencies.

2017 Legislative Update: Winners and Losers

May 4, 2017 was adjournment of the Legislature.  This year, there is a lingering sense that something is unfinished – that something being the Rail Bill, SB 1183, which can’t be signed into the law unless the House and Senate agree on a version of the bill.  We’ll now go through some of the losers, the bills that are now dead, and the winners, which have been sent up to the Governor’s office for approval or veto.

Some Bills Dead for This Session

SB 404 Status:  Dead (Tax on Electronic Smoking Devices)
620 Status:  Dead (Reporting Requirements and Economic Nexus for Remote Sellers)
SB665 Status:  Dead (Expand Solar Credit to Include Battery Backup Systems)
SB 683 Status:  Dead (Constitutional Amendment on Real Property Tax Surcharge for Education)
SB 686 Status:  Dead (Law Implementing Real Property Tax Surcharge for Education)
SB 1290 Status:  Dead (TAT Sharing with the Counties)
HB 1587 Status:  Dead (Vehicle Ad Valorem Tax, Fuel Tax)
HB 263 Status:  Dead (Tax on Medical Marijuana)
HB 1012 Status:  Dead (Tax on REITs)
HB 1471 / SB 704 Status:  Both Dead (Allow Platform to Withhold Tax on Transient Vacation Rentals)
HB1593 Status:  Dead (Uses Green Infrastructure Fund for Energy Storage Rebates)

Choo-Choo-Choo!  Two Different Tracks!  Will There Be a Winner?

By far the most drama in this session concerned the Honolulu rail surcharge.  The 0.5% GET surcharge that is imposed in the City & County of Honolulu is set to expire in 2027, after having received a five-year extension in 2015.  The Senate’s version of SB 1183, which the City favors, extends the surcharge for 10 years while dropping the State’s “skim” to 1%, down from the 10% in current law.  The House version cuts the extension to one year while also dropping the “skim” to 1%, making up the difference by hoisting the Transient Accommodations Tax (TAT) by a full percentage point for ten years.  House members noted that their version would result in the City getting more money now instead of waiting for it for ten years, and would have less impact on the elderly and the poor.  However, tourism industry stakeholders, learning for the first time at the end of April that the TAT was in play, gave lawmakers an earful.
SB 1183 Status:  Dead, but a Special Session May Be in the Works

Income Tax Poverty Relief, “Robin Hood” Style:  May Start in 2018

The Hawaii income tax now has brackets that haven’t been adjusted since the 1960’s.  Now a single person making the same as the federal poverty line for Hawaii is taxed in not the lowest or second lowest, but the fourth tax bracket.  To deal with the poor people who are getting taxed anyway, we offer a low-income household renters credit and a food/excise tax credit.
The top tax rates of 9%, 10%, and 11%, which expired at the end of last year, would be resurrected by HB 209 to pay for an extended low-income household renters credit, a renewed food/excise tax credit, and a new nonrefundable earned income tax credit based on 20% of the federal EITC.  These rates take effect in 2018:
Filing Status
Starts At
Head of Household
Married Filing Jointly
In the meantime, HB 375, which used to contain income tax bracket adjustments, has morphed into an appropriation for homeless programs.  The validity of the bill is questionable because it is titled “Relating to Taxation.”
HB 209 Status:  CD1 Passed Final Reading, Enrolled to Governor
HB 375 Status:  CD1 Passed Final Reading, Enrolled to Governor

Obamacare for Hawaii?  Let’s Study It Before It Really Dies

With Republicans in control of both houses of Congress and the White House, many believed that the end is near for what we now know as the Affordable Care Act or Obamacare, although recent events in Washington, D.C. proved that the Act is still alive and kicking, for now.  HB 552 started out as a bill to make sure that Obamacare lives on in Hawaii by requiring Hawaii health care policies to conform to Obamacare standards, and by requiring individuals to buy minimum essential coverage for themselves and their dependents.  It has turned into a bill requiring further study of the issue.
HB 552 Status:  CD1 Passed Final Reading, Enrolled to Governor

Lights, Camera, Five More Years of Action!

Act 88, SLH 2006, enacted the motion picture, digital media, and film production credit of 15% of qualified spending on Oahu and 20% on the other islands.  The credit was increased in 2013 to 20% on Oahu and 25% on the other islands.  It currently expires at the beginning of 2019.  In the aftermath of a scathing Legislative Auditor’s report criticizing DOTAX’s handling of the credit, this year’s extender bill, HB 423, extends the credit’s sunset to 2024.  It adds verification and reporting requirements, including one requiring a production to get a cost report verified by a CPA.  Controversial “cultural sensitivity” requirements did not make it into the final version of the bill, nor did a requirement for a production getting more than $8 million of credit to agree to provide an advanced screening of the finished product in the county of the island in which most of the production took place.
HB 423 Status:  Passed Final Reading, Enrolled to Governor