Income/Franchise:
Hawaii: New Law Revises Some Pass-Through Entity-Level Tax Provisions Including Tax Rate

S.B. 2725, signed by gov. 6/19/24. Applicable for taxable years beginning after December 31, 2023, recently signed legislation revises various provisions under Hawaii law allowing qualifying pass-through entities to make an annual election to pay an entity-level state tax (PTET) [see S.B. 1437 (2023) and previously issued Multistate Tax Alert for more details on this PTET]. For instance, the legislation amends the PTET rate applied to the sum of all qualified member’s distributive shares and guaranteed payments of Hawaii taxable income to be fixed at 9%, rather than imposed at the highest individual income tax rate under Haw. Rev. Stat. section 235-51. For pass-through entities electing to pay the PTET, the legislation also permits certain “qualified members” entitled to a tax credit to use the credit against the member’s net income tax liability in subsequent years until exhausted. Moreover, the legislation adds a definition for “qualified member” as meaning a member of an electing pass‑through entity that is an individual, trust, or estate, and simultaneously repeals the definitions for “direct member” and “indirect member.” Under the new law, a “member” means:

1. A shareholder of an S corporation;
2. A partner in a general partnership, a limited partnership, or a limited liability partnership; or
3. A member of a limited liability company that is treated as a partnership or S corporation for federal income tax purposes.

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