Income tax is already a complicated enough issue. Certain things are income and certain things are not income. Some expenses can be written off and some cannot. Under House Bill 1041, which is not yet law but is expected to become law, Hawaii income tax will reflect certain changes to the federal tax law and will go its own way with a few others.
No Second Round Reclaim Discount Tax: The CARES Act provided for reclaim discounts or economic impact payments of up to $ 2,400 in the first round. At the 2020 session, our lawmakers passed laws stating that, like federal treatment, these payments would not constitute taxable income for state income tax purposes. This year’s bill looked at the second round, namely the $ 600 payments, and stipulates that these are also non-taxable. The third round of payments, the US Rescue Plan Act (ARPA) payments of $ 1,400, went into effect in early 2021 and will be considered in the 2022 legislature.
Unemployment Benefit Tax: According to the ARPA, individuals can exclude $ 10,200 from unemployment benefits through 2020. Hawaii will not copy the exclusion. That costs too much. If you received Unemployment Benefit in 2020 and did not choose to withhold Hawaii tax, then you should take paying the estimated Hawaii tax very seriously.
PPP, EIDL, and other federal grants and eligible loans are exempt, but the associated costs are non-deductible: there was plenty of news about the Payment Protection Program, Catastrophe Loans for Economic Injury, and new specialized grants to support restaurants. Hawaii announced that the money will not be taxable income if the federal government makes these loans or makes grants under the PPP. The tax treatment of EIDL grants was not governed by the CARES Act, and the Consolidated Funds Act included a provision that these grants would also not constitute taxable income. Hawaii’s bill reflects this treatment.
However, the Feds went one step further in the Consolidated Appropriations Act and ARPA, and Hawaii will not take that additional step. This is what happened.
When the CARES Act first granted us the forgivable PPP loans, the Internal Revenue Service issued a notice, and later a Revenue Ruling, telling us that under the normal rules of the Internal Revenue Code, the payment of expenses, which lead to the granting of loans, is possible. “T be deducted for tax purposes. This is because expenses related to taxable income are deductible but expenses related to tax free income are not, as it would result in a double benefit. It would not be beneficial to deduct expenses from tax-exempt income so that expenses would be deducted from other taxable income, which at the time did not seem to be what Congress intended.
However, in the Consolidated Appropriations Act and ARPA, Congress had provisions that said they would in fact give taxpayers a double benefit. The question for lawmakers in Hawaii was whether they would adapt to this benefit as well. Legislators found that copying this benefit would cost even more than getting rid of unemployment benefits. Therefore, they decided to decouple from this service as well.
No GET on lending: Regardless of the legislative process, the Ministry of Finance came to the conclusion that PPP or EIDL grants or lending are not subject to the GET and do not need to be reported via the GET returns. The ruling sounds like the ministry is doing everyone a favor, but the conclusion follows another precedent called the “general welfare exclusion” and concludes that state payments made on an as-needed basis are not considered gross income and therefore would not be subject to GET.