HAR §18-235-110.6. Fuel tax credit for commercial fishers

(a) The tax credit provided by section 235- 110.6, HRS, shall be equal to the amount of state and county fuel taxes imposed by section 243-4(a), HRS, upon all liquid fuel purchased for use by the principal operators of commercial fishing vessels. (1) The fuel tax credit shall be available only to a principal operator who purchases and actually uses the fuel to operate a fishing vessel for commercial purposes. Taxes paid on fuel used for operating ancillary equipment on board the vessel, such as pumps, gasoline-powered winches, and other related equipment shall likewise qualify for the credit. (2) The amount of credit shall be limited to the amount of tax paid by the principal operator for fuel which is actually used to operate the vessel. Fuel taxes paid upon fuel used in the operation of pickup trucks, airplanes, or any other purpose or use not directly related to the operation of the commercial fishing vessel shall not qualify for the credit. HRS §235-102 HRS §235-109 HRS §235-110.6 §18-235-110.6 INCOME TAX LAW 235- 136 (Unofficial Compilation as of 12/31/2025) Example 1: Taxpayer uses a pickup truck to deliver fish to market. The fuel used to operate the pickup truck is not directly related to the operation of the fishing vessel, and therefore, taxes paid on the fuel do not qualify for the credit. Example 2: Taxpayer uses an airplane to scout the ocean for fish. Upon spotting a school of fish, a fishing vessel is dispatched for the haul. Taxes paid upon the fuel used to operate the airplane do not qualify for the credit; only taxes paid on fuel for the operation of the fishing vessel may be included in calculating the credit. Example 3: Taxpayer conducts research and performs experiments for the University of Hawaii to improve commercial fishing techniques, methodology, and practices, for which the taxpayer receives payment. Because this is not primarily a commercial fishing endeavor, tax paid on fuel used in a research or experimental expedition shall not be included for credit. (3) The fuel tax credit shall not apply to fuel used in the operation of charter fishing boats and the like, where the income is derived from fees and other sources rather than from commercial fishing. (4) The fuel tax credit shall not apply to an individual or an electing small business corporation (S corporation) for fuel tax paid for fuel used in the operation of a fishing vessel where the activity is not engaged in for profit, as provided in section 183, IRC, (activities not engaged in for profit). Example: Taxpayer retired and moved to Hawaii. She purchased a cabin cruiser which is used by taxpayer and her friends for fishing. When the catch of fish is in excess of the taxpayer’s needs, the excess is sold. During the taxable year, the taxpayer grossed $35,000 from the sale of fish and received $50,000 of income exempt from state income tax. The taxpayer attached schedule “C” (Profit or (Loss) from Business or Profession) to both her state and federal individual income tax returns, resulting in a net loss from the fishing activity of $15,000. Taxpayer claimed a refundable credit for the amount of fuel tax paid on fuel used to operate the fishing vessel. The Internal Revenue Service reviewed the taxpayer’s tax return and the loss was disallowed under section 183, IRC, as an activity not engaged in for profit. Conclusion: The taxpayer’s activity does not qualify for the fuel tax credit. The fishing activity is considered a hobby for purposes of section 183, IRC, not a commercial fishing operation. (b) To qualify as a principal operator in order to claim the fuel tax credit under section 235-110.6, HRS, at least fifty-one per cent of the taxpayer’s gross annual income must be derived from commercial fishing operations. Gross income, for purposes of this subsection, shall not include nontaxable income such as pensions, social security, welfare payments, and excluded interest. Example: Taxpayer is retired from the military and receives a pension of $15,000 and interest from United States bonds of $2,000 for the taxable year. He leased a boat and engaged in commercial fishing for eight months of the taxable year. His gross income, taxable by Hawaii, from fishing was $16,000. Conclusion: Since the taxpayer derived at least fifty-one per cent of his gross annual income from commercial fishing operations, he qualifies for the fuel tax credit in an amount equal to the fuel tax that he paid on fuel used to operate the commercial fishing vessel for the taxable year. (c) For the purpose of determining whether commercial fishing activities make up at least fifty-one per cent of the taxpayer’s gross annual income, only the gross income of the principal operator will be considered. The application of this provision is illustrated by the following examples: Example 1: H and W (husband and wife) file a joint tax return for the taxable year. H is retired and receives a pension of $20,000 for the taxable year. His other income includes $10,000 in interest and $400 in dividends. During the taxable year H also derives $30,000 from commercial fishing operations. W receives $18,000 in wages and $12,000 in rent from rental property owned solely by her. INCOME TAX LAW §18-235-110.7-02 235- 137 (Unofficial Compilation as of 12/31/2025) Conclusion: H may claim the fuel tax credit. For purposes of claiming the credit, only H’s income is considered. Since his pension is excludable from gross income, the $30,000 derived from commercial fishing operations is greater than fifty-one per cent of his annual gross income, qualifying him for the fuel tax credit. Example 2: A and B form a partnership, purchase a boat, and engage in commercial fishing. The annual gross income of the partnership derived from commercial fishing is $80,000. A and B equally share in the income and expenses of the partnership. In addition to the partnership income, A has wages of $20,000 and gross rents of $20,000. B receives, in addition to the partnership income, a federal pension of $25,000, interest from federal bonds of $5,000, Hawaii tax exempt bond interest of $15,000, and a net short term capital gain of $10,000. Conclusion: Since A and B are equal partners, each is deemed to have $40,000 gross annual income from commercial fishing. A’s gross income for the taxable year is $80,000. Since A did not derive at least fifty-one per cent of his gross annual income from the commercial fishing operation, he does not qualify for the fuel tax credit for commercial fishers. B’s gross income for state purposes is $50,000. Since the $40,000 of gross income derived from commercial fishing activities exceeds fifty-one per cent of B’s annual gross income, B qualifies for the fuel tax credit. B may only claim B’s share, or one-half, of the fuel tax paid on fuel purchased for the commercial fishing vessel. (d) The principal operator shall prepare such forms as may be prescribed by the director of taxation for purposes of claiming the fuel tax credit. The forms shall be submitted with the individual or corporate tax return for the taxable year for which the credit is claimed. (e) The principal operator shall keep full, complete, regular, and accurate records sufficient to establish the amount of gross income received from commercial fishing activities, and the amount of fuel tax paid by the principal operator for the fuel used to operate the commercial fishing vessel. [Eff 2/16/82; am 6/28/93] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §235-110.6) §18-235-110.7-01 Definitions. For purposes of sections 18-235-110.7-01 to 18-235-110.7-22, unless otherwise stated: “ACRS” means the accelerated cost recovery system. “Credit” means the capital goods excise tax credit. “Department” means the department of taxation. “Director” means the director of taxation. “Eligible property” means new section 38 property or used section 38 property (as defined in sections 18-235-110.7-05 and 18-235-110.7-06, respectively). “I.R.C.” means the Internal Revenue Code of 1954, as amended, which includes the Internal Revenue Code of 1986, and the Internal Revenue Code of 1986, as amended. “Lease” is defined as it is for federal income tax purposes. For treatment, see section 18-235-110.7- 02(c). “Sale-leaseback” is defined as it is for federal income tax purposes. For treatment, see section 18-235- 110.7-02(c). [Eff 1/18/90] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §235-110.7) §18-235-110.7-02 Allowance of the credit. (a) In general. There shall be allowed to each taxpayer subject to the tax imposed by chapter 235, HRS, a credit which shall be deductible from the taxpayer’s net income tax liability, if any, for the taxable year in which the credit is properly claimed, if the following conditions are met: (1) The taxpayer purchases or imports eligible property; (2) The purchase or import of eligible property results in a transaction which is subject to the imposition and payment of tax at the rate of four per cent under chapters 237 or 238, HRS; (3) The eligible property is used by the taxpayer in a trade or business; (4) The eligible property is placed in service within Hawaii after December 31, 1987 (for property acquired during the period beginning January 1, 1988, to December 31, 1988, see section 18-235-110.7-09); and (5) The taxpayer files a claim for the credit on or before the end of the twelfth month following the close of the taxable year for which the credit may be claimed, or if an extension of time for filing a return has been granted, within the extension period. (b) Taxable year in which the credit is allowable. The credit shall be allowed only for the first taxable year in which the property is placed in service by the taxpayer. (1) If a taxpayer places property in service in a taxable year and the property does not qualify as eligible property (or only a portion of the property qualifies as eligible property) in that year, HRS §235-110.7 HRS §235-110.7 §18-235-110.7-03 INCOME TAX LAW 235- 138 (Unofficial Compilation as of 12/31/2025) no credit (or a credit only as to the portion which qualifies in that year) shall be allowed to the taxpayer with respect to the property. This is the rule notwithstanding that the property (or a greater portion of the property) qualifies as eligible property in a subsequent taxable year. (2) Example. Paragraph (1) is illustrated as follows: In 1988, a taxpayer places property in service and uses the property entirely for personal purposes. In 1989, the taxpayer begins using the property in a trade or business. In this case, no credit is allowable to the taxpayer, with respect to the property, for either 1988 or 1989. (3) Constructed, reconstructed, or erected property which is placed in service over a span of more than one taxable year, see section 18-235-110.7-11. (c) Taxpayer who is eligible for the credit in lease or sale-leaseback transactions. (1) In general. The determination of the taxpayer who is entitled to the credit when the parties characterize a transaction as a lease or sale-leaseback (as defined in section 18-235-110.7- 01) requires an analysis of whether the transaction is, in fact, a lease or sale-leaseback for federal income tax purposes. The characterization of a transaction as a lease or sale- leaseback determines who is the economic owner of the property and thereby entitled to the tax benefits (i.e., credit) associated with the property. Only one party, the economic owner of the property, is entitled to claim any available credit. (2) Lease. If a transaction is a lease for federal income tax purposes, the lessor entering into a lease agreement with respect to property which is eligible for the credit is treated as the owner of the property. The lessor may thereby claim any available credit. (3) Sale-leaseback. If a transaction is a sale-leaseback for federal income tax purposes, the buyer/lessor entering into a sale-leaseback arrangement with respect to property which is eligible for the credit is treated as the owner of the property. The buyer/lessor may thereby claim any available credit. (4) Sale. If the parties characterize a transaction as a lease, but it is in reality a sale for federal income tax purposes, the lessee is the owner of the property. Assuming that the property is eligible for the credit, the lessee may thereby claim any available credit. Note that for purposes of this paragraph, the term “lessee” is used for convenience, without intending to suggest the propriety of the parties’ characterization of the transaction as a lease. (d) Solar and wind energy property. If a taxpayer is eligible for both the income tax credit under section 235-12, HRS (regarding solar or wind energy devices), and the capital goods excise tax credit for a particular solar or wind energy property, the credit under section 235-12, HRS, shall be deducted from the taxpayer’s net income tax liability before the capital goods excise tax credit. [Eff 1/18/90] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §235- 110.7) §18-235-110.7-03 Property eligible for the credit. The determination of whether property is eligible for the credit must be made with respect to the first taxable year in which the property is placed in service by the taxpayer. Property which is eligible for the credit is (1) new section 38 property (as defined in section 18-235-110.7- 05), or (2) used section 38 property (as defined in section 18-235-110.7-06). [Eff 1/18/90] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §235-110.7) §18-235-110.7-04 Section 38 property. (a) In general. Section 38 property is defined as: (1) Property which is (A) tangible personal property, or (B) other tangible property; (2) Recovery property (within the meaning of I.R.C. section 168, without regard to useful life), or any other property with respect to which depreciation is allowable to the taxpayer; and (3) Property which has an estimated useful life or recovery period (determined as of the time the property is placed in service) of three years or more. A property shall have the same estimated useful life or recovery period as that which is used for depreciation or ACRS purposes. (b) Tangible personal property. (1) In general. Tangible personal property (other than a central air conditioning or heating unit), as defined in paragraph (2), may qualify as section 38 property regardless of whether it is used as an integral part of an activity (or constitutes a research or storage facility used in connection with such activity) specified in subsection (c). (2) “Tangible personal property”, defined. For purposes of the credit, the term tangible personal property” means any tangible property except land and improvements thereto, HRS §235-110.7 HRS §235-110.7 INCOME TAX LAW §18-235-110.7-04 235- 139 (Unofficial Compilation as of 12/31/2025) such as buildings or other inherently permanent structures (including items which are structural components of the buildings or structures). The terms “building” and “structural components” are defined in subsection (1). Thus, buildings, swimming pools, paved parking areas, wharves, docks, bridges, and fences are not tangible personal property. Tangible personal property includes all property (other than structural components) which are contained in or attached to a building. Property such as production machinery, printing presses, transportation and office equipment, refrigerators, grocery counters, testing equipment, display racks and shelves, and neon and other signs, which are contained in or attached to a building constitute tangible personal properties for purposes of the credit. Further, all property in the nature of machinery (other than structural components of a building or other inherently permanent structure) shall be considered tangible personal property even though located outside a building. For example, a gasoline pump, hydraulic car lift, or automatic vending machine, although annexed to the ground, shall be considered tangible personal property. (c) Other tangible property. In addition to tangible personal property, other tangible property (not including a building and its structural components) may qualify as section 38 property if one of the following three conditions is met: (1) The property is used as an integral part (as defined in subsection (d)) of manufacturing, production, extraction, or furnishing transportation, communication, electrical energy, gas, water, or sewage disposal services; (2) The property is a research or storage facility used in connection with an activity referred to in paragraph (1): (A) Examples of research facilities include wind tunnels and test beds; (B) Examples of storage facilities include oil and gas storage tanks; (C) Although a research or storage facility must be used in connection with one of the specified activities in paragraph (1), the taxpayer-owner of the facility need not be engaged in the specified activity. For example, if a research or storage facility is used in connection with a manufacturing process, the taxpayer-owner of the facility need not be engaged in the manufacturing process; or (3) The property is a facility used in connection with an activity referred to in paragraph (1) for the bulk storage of fungible commodities (including commodities in a liquid or gaseous state). (d) “Integral part”, defined. Property is used as an integral part of one of the specified activities in subsection (c) if it is used directly in the activity and is essential to the completeness of the activity. (1) Examples include fences used to confine livestock and telephone poles. In the case of manufacturing, for example, all properties used by a taxpayer to acquire or transport raw materials or supplies to the point where the actual processing commences (e.g., dock), or to process raw materials into the taxpayer’s final product, are considered property used as an integral part of manufacturing. (2) Property such as pavements, paved parking areas, inherently permanent advertising displays, inherently permanent outdoor lighting facilities, or swimming pools, although used in the operation of a business, ordinarily is not used as an integral part of any of the specified activities in subsection (c), and therefore does not qualify for the credit. (3) Property shall be considered to be used as an integral part of one of the specified activities in subsection (c) if it is used by either the owner of the property or the lessee of the property. (e) “Manufacturing, production, and extraction”, defined. The terms manufacturing, production, and extraction include: (1) the construction, reconstruction, or making of property out of scrap, salvage, junk, new, or raw material by processing, manipulating, refining, or changing the form of an article, or by combining or assembling two or more articles; (2) the cultivation of the soil; (3) the raising of livestock; and (4) the mining of minerals. Examples include property used as an integral part of the extraction, processing, or refining of metallic and nonmetallic minerals; the construction of roads, bridges, or housing; the processing of meat, fish, or other foodstuffs; the cultivation of orchards, gardens, or nurseries; the production of lumber, lumber products, or other building materials; the fabrication or treatment of textiles, paper, or glass; and the rebuilding, as distinguished from the mere repairing, of machinery. (f) “Transportation business”, defined. A transportation business includes airlines, bus companies, shipping or trucking companies, and oil pipeline companies. (g) “Communication business”, defined. A communication business includes telephone, telegraph, or cable companies, and radio or television broadcasting companies. (h) “Bulk storage”, defined. Bulk storage means the storage of a commodity in a large mass prior to its consumption or use. For example, if a facility is used to store macadamia nuts which have not been sorted or processed, §18-235-110.7-04 INCOME TAX LAW 235- 140 (Unofficial Compilation as of 12/31/2025) the facility is used for bulk storage; however, if a facility is used to store macadamia nuts that have been sorted and canned, it is not used for bulk storage. (i) Recovery or depreciable property requirement. Section 38 property must be either recovery property (within the meaning of I.R.C. §168, without regard to useful life), or any other property with respect to which depreciation is allowable to the taxpayer. (1) If only part of a property is depreciable, only a pro rata portion of the property may qualify as section 38 property. (2) Example. Paragraph (1) is illustrated as follows: A property is used 90 per cent of the time in a trade or business, and 10 per cent of the time for personal purposes. In this case, only 90 per cent of the basis of the property may qualify as section 38 property which is eligible for the credit. (3) Property does not qualify as section 38 property to the extent that a deduction for depreciation thereon is disallowed under I.R.C. §274 (regarding the disallowance of certain entertainment, etc., expenses). (j) Boilers fueled by oil or gas. Generally, any boiler, used in Hawaii, which is primarily fueled by petroleum or petroleum products (including natural gas) qualifies as section 38 property. (k) Energy property. (1) In general. Certain energy property qualifies as section 38 property. The energy property must be intended to reduce the amount of oil, natural gas, or other energy consumed in heating or cooling a building or used in an industrial process. (2) “Energy property”, defined. Energy property is: (A) Alternative energy property. Alternative energy property consists of the following types of property: (i) A boiler, the primary fuel for which will be an alternate substance. An alternate substance is any substance other than oil, natural gas, or any product of oil and natural gas; (ii) A burner (including necessary on-site equipment to bring the alternate substance to the burner) for a combustor other than a boiler if the primary fuel for the burner will be an alternate substance; (iii) Equipment for converting an alternate substance into a synthetic liquid, gaseous, or solid fuel; (iv) Equipment designed to modify existing equipment which uses oil or natural gas as fuel or as feedstock so that the existing equipment will use either a substance other than oil and natural gas, or oil mixed with a substance other than oil and natural gas (where the other substance will provide not less than twenty-five per cent of the fuel or feedstock); (v) Equipment to convert coal (including lignite), or any non-marketable substance derived therefrom, into a substitute for a petroleum or natural gas derived feedstock for the manufacture of chemicals or other products, or coal (including lignite), or any substance derived therefrom, into methanol, ammonia, or a hydroprocessed coal liquid or solid; (vi) Pollution control equipment required (by federal, state, or local regulations) to be installed on or in connection with equipment described in clauses (i) to (v); (vii) Equipment used for the unloading, transfer, storage, reclaiming from storage, and preparation (including, but not limited to, washing, crushing, drying, and weighing) at the point of use for an alternate substance for use in equipment described in clauses (i) to (vi). This includes equipment used for the storage of fuel derived from garbage at the site at which fuel was produced from garbage; and (viii) Equipment used to produce, distribute, or use energy from a geothermal deposit, but only, in the case of electricity generated by geothermal power, up to (but not including), the electrical transmission state. A geothermal deposit is a geothermal reservoir consisting of natural heat which is stored in rocks or in an aqueous liquid or vapor (whether or not under pressure). The deposit shall not be treated as a gas well. (B) Solar or wind energy property. Solar or wind energy property means any equipment which uses solar or wind energy to: (i) Generate electricity; INCOME TAX LAW §18-235-110.7-04 235- 141 (Unofficial Compilation as of 12/31/2025) (ii) Heat or cool (or provide hot water for use in) a structure; or (iii) Provide solar process heat. (C) Specially defined energy property. Specially defined energy property is property which is installed in an existing industrial or commercial facility to reduce the amount of energy consumed in the existing industrial or commercial process. The term includes a recuperator, heat wheel, regenerator, heat exchanger, waste heat broiler, heat pipe, automatic energy control system, turbulator preheater, combustible gas recovery system, economizer, modifications to alumina electrolytic cells, modifications to chlor- alkali electrolytic cells, or any other property of a kind specified by the department, the principal purpose of which is to reduce the amount of energy consumed in an existing industrial or commercial process and which is installed in an existing industrial or commercial facility. (D) Recycling equipment. (i) In general. Recycling equipment includes any equipment which is used exclusively to sort and prepare solid waste for recycling or in the recycling of solid waste. (ii) Certain equipment not included. The term recycling equipment does not include any equipment used in a process after the first marketable product is produced or in the case of recycling iron or steel, any equipment used to reduce the waste to a molten state and in any process thereafter. (iii) Ten per cent virgin material allowed. Any equipment used in the recycling of material which includes some virgin materials shall not be treated as failing to meet the exclusive requirements of clause (i) if the amount of the virgin materials is ten per cent or less. (iv) Certain equipment included. The term recycling equipment includes any equipment which is used in the conversion of solid waste into a fuel or into useful energy such as steam, electricity, or hot water. (E) Hydroelectric generating property. Hydroelectric generating property means property installed at a hydroelectric site which is: (i) Equipment for increased capacity to generate electricity by water (up to, but not including, the electrical transmission stage); and (ii) Structures for housing the generating equipment, fish passageways, and dam rehabilitation property, required by reason of the installation of equipment described in clause (i). (F) Cogeneration equipment. (i) In general. Cogeneration equipment means property which is an integral part of a system for using the same fuel to produce both qualified energy and electricity at an industrial or commercial facility. (ii) “Qualified energy”, defined. Qualified energy means steam, heat, or other forms of useful energy (other than electric energy) to be used for industrial, commercial, or space-heating purposes (other than in the production of electricity). (iii) “Industrial”, defined. Industrial includes the purification of water and the desalinization of water. (G) Biomass property qualifies for the credit. Biomass property means property which is a boiler, the primary fuel for which is an alternate substance, a burner (including necessary on-site equipment to bring the alternate substance to the burner) for a combustor other than a boiler if the primary fuel will be an alternate substance, or equipment for converting an alternate substance into a qualified fuel, including equipment used to store fuel derived from garbage at the site at which such fuel was produced from garbage. For purposes of defining biomass property, an alternate substance means any substance other than an inorganic substance and coal (including lignite) or any coal product. Biomass property also includes pollution control equipment which is required to be installed on or in connection with the above equipment, as well as equipment used for the unloading, transfer, storage, reclaiming from storage, and preparation at point of use of an alternate substance for use in that equipment. (l) Property which generally does not qualify as section 38 property. Certain classes of property which generally do not qualify as section 38 property and thereby are not eligible for the credit include: (1) A building or its structural components. §18-235-110.7-04 INCOME TAX LAW 235- 142 (Unofficial Compilation as of 12/31/2025) (A) “Building”, defined. (i) In general. A building is any structure or edifice which encloses a space within its walls, and is usually covered by a roof. The purpose of the structure or edifice is, for example, to provide shelter or housing, or to provide working, office, parking, display, or sales space. The term includes, among other structures, apartments, factory and office buildings, warehouses, barns, garages, bus stations, and stores. The term also includes any such structure which is constructed by or for a lessee, even if the structure must be removed, or ownership of the structure reverts to the lessor at the termination of the lease. (ii) Property which is excluded from the definition of building and which thereby may be eligible for the credit. A building does not include a structure which is essentially an item of machinery or equipment; or a structure which houses property used as an integral part of manufacturing, producing, extracting, or furnishing transportation, communications, electrical energy, gas, water, or sewage disposal services if the use of the structure is so closely related to the use of the property that the structure can be expected to be replaced when the property it initially houses is replaced. (iii) Factors which indicate that a building or structure is closely related to the use of a particular property it houses include the following: the structure is specifically designed to provide for the stress and other demands of the property; and the structure could not be economically used for other purposes. Examples of such structures include oil and gas storage tanks, feed storage bins, silos, and crop shelters. (B) “Structural component”, defined. (i) In general. A structural component includes parts of a building such as walls, partitions, floors, ceilings, and permanent coverings therefor such as paneling or tiling; windows and doors; all components (whether in, on, or adjacent to the building) of a central air conditioning or heating system, including motors, compressors, pipes, and ducts; plumbing and plumbing fixtures (e.g., sinks and bathtubs); electric wiring and lighting fixtures; chimneys; stairs, escalators, and elevators, including all components relating to the operation or maintenance of a building. (ii) Property which is excluded from the definition of structural component and thereby may be eligible for the credit. The term structural component does not include property which is contained in or attached to a building such as production machinery, the sole justification for the installation of which is to meet temperature or humidity requirements which are essential for the operation of other machinery or the processing of materials or foodstuffs. Machinery may meet this sole justification test even though it incidentally provides for the comfort of employees, or serves, to an insubstantial degree, areas where the temperature or humidity requirements are not essential. (C) Whether property is classified as a structural component is largely determined by the manner of attachment to the land or the structure, and how permanently the property is designed to remain in place. The following are among the factors which the department may consider in making this determination: (i) The manner of affixation (permanent or detachable) of the property to the land; (ii) Whether the property is capable of being moved, and whether it has in fact been moved; (iii) Whether the property is designed or constructed to remain permanently in place; (iv) Circumstances which tend to show the expected or intended length of affixation; (v) Whether the removal of the property is substantial and time consuming; (vi) Whether the property is readily removable; and (vii) The extent of damage that the property will sustain if it is removed. (2) Property purchased for use in a foreign trade zone (as defined under chapter 212, HRS). (3) Property used by an organization which is exempt from the tax imposed by chapter 235, HRS, unless the property is used predominantly in an unrelated trade or business, the income from which is subject to tax under chapter 235, HRS (with respect to the imposition of tax on unrelated business income of charitable, etc., organizations). (A) “Property used by an organization”, defined. Property used by an organization means property owned by the organization. INCOME TAX LAW §18-235-110.7-04 235- 143 (Unofficial Compilation as of 12/31/2025) (B) Example. Subparagraph (A) is illustrated as follows: A tax-exempt organization which is not subject to the imposition of tax under chapter 235, HRS, places in service a copying machine. The copying machine is used in an income producing activity which is subject to taxation under chapter 237, HRS. The tax-exempt organization has no unrelated trade or business income subject to tax under chapter 235, HRS (with respect to the imposition of tax on unrelated business income of charitable, etc., organizations). The copying machine would be considered to be property used by the organization. Although the copying machine may otherwise qualify for the credit, since the organization is not a taxpayer subject to the imposition of tax under chapter 235, HRS, the organization cannot claim a credit for the copying machine. (4) Intangible property (e.g., patent, copyright, subscription list). (5) Property used for lodging. (A) “Property used for lodging”, defined. Property used for lodging is property which is used predominantly to furnish lodging; or in connection with the furnishing of lodging. (i) “Property used predominantly to furnish lodging”, defined. Property used predominantly to furnish lodging includes that which is used in the living quarters of a lodging facility (e.g., beds, other furniture, refrigerators, ranges, and other equipment). (ii) “Lodging facility”, defined. A lodging facility includes an apartment house, hotel, motel, dormitory, or other facility (or part of a facility) where sleeping accommodations are provided and let; however, the term does not include a facility which is used primarily as a means of transportation (e.g., aircraft, vessel) or to provide medical or convalescent services, even though sleeping accommodations are provided. (iii) “Property used predominantly in connection with the furnishing of lodging”, defined. Property used predominantly in connection with the furnishing of lodging includes that which is used to operate a lodging facility or to serve tenants, whether furnished by the owner of the lodging facility or another person (e.g., lobby furniture, office equipment, laundry, and swimming pool facilities). However, property used in furnishing, to the management of a lodging facility or its tenants, electrical energy, water, sewage disposal services, gas, telephone services or other similar utility services shall not be treated as property used in connection with the furnishing of lodging (e.g., gas and electric meters, telephone poles and lines, telephone station and switchboard equipment, and water and gas mains which are furnished by a public utility). (B) Exceptions. (i) A nonlodging commercial facility which is available to persons not using the lodging facility on the same basis as it is available to tenants of the lodging facility may qualify as section 38 property which may be eligible for the credit. Examples include restaurants, drug stores, grocery stores, and vending machines located in the lodging facility. (ii) Property used by a hotel, motel, or other similar establishment in connection with the trade or business of furnishing lodging where the predominant portion (i.e., more than one-half) of the accommodation in the hotel, motel, or other similar establishment is used by transients may qualify as section 38 property which is eligible for the credit. An accommodation shall be considered to accommodate transients if the rental period is normally less than thirty days. Thus, if greater than one-half of the living quarters of a hotel, motel, or other similar establishment is used during the taxable year to accommodate transients, the property used by the hotel, motel, or other similar establishment may qualify as section 38 property. On the other hand, if one-half or less of the living quarters of a hotel, motel, or other similar establishment is used during the taxable year to accommodate transients, the property used by the hotel, motel, or other similar establishment would not qualify as section 38 property. (iii) Coin-operated vending machines and coin-operated washing machines and dryers may qualify as section 38 property. §18-235-110.7-05 INCOME TAX LAW 235- 144 (Unofficial Compilation as of 12/31/2025) (m) The definition of section 38 property is limited to the provisions in this section. [Eff 1/18/90] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §235-110.7) §18-235-110.7-05 New section 38 property. For calendar year 1988 (and fiscal year taxpayer acquisitions occurring during the period beginning January 1, 1988, to December 31, 1988), and for calendar years beginning after December 31, 1988 (and fiscal year taxpayer acquisitions occurring after December 31, 1988). Property qualifies as new section 38 property if one of the following conditions is met: (1) Section 38 property, the original use of which commences with the taxpayer after December 31, 1987, and commences after the date the taxpayer acquires it. (A) “Original use”, defined. Original use means the first use to which the property is put, whether or not it is the taxpayer’s first use of the property. (B) Examples. Subparagraph (A) is illustrated as follows: Example 1. A taxpayer purchases a reconditioned or rebuilt machine. In this case, the property would not qualify as new section 38 property because the taxpayer would not be treated as the first user of the property; however, the property may qualify as used section 38 property (as discussed in section 18-235-110.7-06). Example 2. A florist purchases antique bread racks to serve as display cases for the plants in the shop. The florist will not be treated as the original user of the racks. The fact that the racks serve a new purpose does not change their used property status. (2) Section 38 property which is: (A) Sold and leased back by the same taxpayer within three months of the date the property was originally placed in service by the taxpayer; or (B) Leased to the same taxpayer within three months of the date the property was originally placed in service by that taxpayer. (C) Example. Subparagraph (B) is illustrated as follows: Taxpayer A (“A”) buys property from a manufacturer, takes delivery of the property, and places it in service before A has its financing in place. Shortly thereafter, A sells it (or assigns the purchase order) to Taxpayer B, who then leases it to A. (3) Section 38 property, the construction, reconstruction, or erection of which is placed in service by the taxpayer after December 31, 1987, but only with respect to that portion of the basis as is discussed in section 18-235-110.7-11(c). (A) It is not necessary that the materials entering into the construction, reconstruction, or erection be new in use. (B) Construction, reconstruction, or erection begins when physical work is started on the construction, reconstruction, or erection. (C) See section 18-235-110.7-11(c) for a discussion of the basis of new section 38 property which has been constructed, reconstructed, or erected. [Eff 1/18/90] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §235-110.7) §18-235-110.7-06 Used section 38 property. (a) For calendar year 1988 (and fiscal year taxpayer acquisitions occurring during the period beginning January 1, 1988, to December 31, 1988). Property qualifies as used section 38 property if: (1) The property is section 38 property (as defined in section 18-235-110.7-04); (2) The property is not new section 38 property (as defined in section 18-235-110.7-05); and (3) The property is not used by the same person (i.e., taxpayer or a related person as defined in I.R.C. §179(d)(2)(A) or (B)) both before and after the purchase. (A) Use by prior user. Property shall not be treated as used section 38 property if the property is used by the same person (i.e., taxpayer or a related person) both before and after its purchase. (B) Substantial use. While used section 38 property must not be used by the same person both before and after its purchase, only substantial use before a purchase disqualifies used property for purposes of the credit. Casual use before a purchase would not disqualify used property from eligibility for the credit. (C) Example. Subparagraph (B) is illustrated as follows: HRS §235-110.7 HRS §235-110.7 INCOME TAX LAW §18-235-110.7-09 235- 145 (Unofficial Compilation as of 12/31/2025) A person rents equipment (1) for a period of 25 days and for a different 2-day period within eleven months of the first rental, and (2) then purchases the equipment. In this case, the prior use of the property will not disqualify it as used section 38 property because the prior use will be considered to have been only on a casual basis. (D) Lease or sale-leaseback. Property sold under a sale-leaseback arrangement in the hands of the buyer/lessor does not qualify as used section 38 property because the seller/lessee continues to use the property. The same result follows where a taxpayer who has been leasing property subsequently purchases the property it had leased. Note that section 38 property which is (i) sold and leased back by the same taxpayer within three months of the date the property was originally placed in service by the taxpayer, or (ii) leased to the same taxpayer within three months of the date the property was originally placed in service by that taxpayer may qualify as new section 38 property (see section 18-235-110.7-05(2)). (b) For calendar years beginning after December 31, 1988 (and fiscal year taxpayer acquisitions occurring after December 31, 1988). Property qualifies as used section 38 property if: (1) The property is section 38 property (as defined in section 18-235-110.7-04); and (2) The property is not new section 38 property (as defined in section 18-235-110.7-05). (c) Basis. See section 18-235-110.7-11(d) for a discussion of the basis of used section 38 property. [Eff 1/18/90] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §235-110.7) §18-235-110.7-07 Purchase. Purchase means an acquisition of property. [Eff 1/18/90] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §235-110.7) §18-235-110.7-08 Placed in service. (a) In general. Property shall be considered to be placed in service in the earliest of the following taxable years: (1) The taxable year in which the period for depreciation with respect to the property begins; (2) The taxable year in which under ACRS, a claim for recovery allowances with respect to the property begins; or (3) The taxable year in which the property is placed in a condition or state of readiness and available for a specifically assigned function by the taxpayer. The following examples illustrate paragraph (3): (A) Parts that are acquired and set aside during the taxable year for use as a replacement for a particular machine in order to avoid operational time loss shall be considered to be in a condition or state of readiness and available for a specifically assigned function by the taxpayer. (B) If operational farm equipment is acquired during the taxable year and it is not practicable to use the equipment for its specifically assigned function in the taxpayer’s business of farming until the following year, the equipment shall be considered to be in a condition or state of readiness and available for a specifically assigned function by the taxpayer in the latter year. (C) Equipment that is acquired for a specifically assigned function and is operational but is undergoing testing to eliminate defects shall be considered to be in a condition or state of readiness and available for a specifically assigned function by the taxpayer. (D) Fruit-bearing trees and vines shall not be considered to be in a condition or state of readiness and available for a specifically assigned function until they have reached an income-producing state. (E) Materials and parts acquired to be used in the construction, reconstruction or erection of an item of equipment shall not be considered to be in a condition or state of readiness and available for a specifically assigned function until the equipment itself is functional. (b) Sale-leaseback. In a sale-leaseback transaction (as defined in section 18-235-110.7-01), the property shall be considered to be placed in service on the date the property was first placed in service by the seller-lessee. [Eff 1/18/90] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §235-110.7) §18-235-110.7-09 Purchased and placed in service. (a) In general. The discussion in this section only applies to claims for and recapture of credit for property acquired during calendar year 1988, and for fiscal year taxpayer acquisitions occurring during the period beginning January 1, 1988, to December 31, 1988. From January 1, 1988, to December 31, 1988, all references in sections 18-235-110.7-01 to 18-235-110.7-22 to the phrase, “placed in service”, shall be substituted by the phrase, “purchased and placed in service”. As a result, for property acquired HRS §235-110.7 HRS §235-110.7 HRS §235-110.7 §18-235-110.7-09 INCOME TAX LAW 235- 146 (Unofficial Compilation as of 12/31/2025) during the period from January 1, 1988, to December 31, 1988, the date corresponding to the substituted phrase, “purchased and placed in service”, shall determine both the availability and recapture of any credit. (b) “Purchased and placed in service”, defined. Purchased and placed in service means the date the property is acquired, available or ready for use, whichever is earlier. Property purchased and placed in service does not include property which is acquired in a related-party transaction. (c) “Related-party transaction”, defined. A related-party transaction is a transaction in which: (1) The acquired property is owned or used at any time during 1987 and 1988 by the taxpayer or related person; or (2) The property is acquired in a transaction in which the user of the property does not change. (d) “Related person”, defined. A related person is: (1) A person whose relationship to a person who is acquiring its property would result in the disallowance of losses under I.R.C. §267 or 707(b) (but, in applying I.R.C. §267(b) and 267(c) for purposes of this paragraph, paragraph (4) of I.R.C. §267(c) shall be treated as providing that the family of an individual shall include only the individual’s spouse, ancestors, and lineal descendants); or (2) One component member of a controlled group who acquires property from another component member of the same controlled group. The term component member of a controlled group is defined by I.R.C. §1563(a), except that the phrase “more than 50 percent” shall be substituted for the phrase “at least 80 percent” each place it appears in I.R.C. §1563(a)(1). (e) Examples. Subsection (b) is illustrated as follows: Example 1. In 1988, a taxpayer pays the entire purchase price for eligible property which is to be delivered in 1989. The taxpayer takes possession of the property in 1989. The property shall be considered to have been purchased and placed in service in 1988. Example 2. In 1988, a taxpayer pays one-half of the entire purchase price for eligible property which is to be delivered in 1989. The taxpayer pays the remaining purchase price and takes possession of the property in 1989. The property shall be considered to have been purchased and placed in service in 1988. Example 3. In 1988, a taxpayer takes possession of and uses eligible property for which the taxpayer makes no payment in 1988, but for which the taxpayer will make full payment in 1989. The taxpayer does in fact pay the entire purchase price for the property in 1989. The property shall be considered to have been purchased and placed in service in 1988. Example 4. In 1988, a taxpayer enters into an installment sales contract to purchase eligible property and takes possession of the property. The property shall be considered to have been purchased and placed in service in 1988. Example 5. In 1988, a taxpayer enters into an installment sales contract to purchase eligible property. The taxpayer takes possession of the property in 1989. The property shall be considered to have been purchased and placed in service in 1988. Example 6. In 1987, a taxpayer pays the entire purchase price for eligible property which is to be delivered in 1988. The taxpayer takes possession of the property in 1988. The property shall be considered to have been purchased and placed in service in 1987 and thereby is not eligible for the credit. Example 7. In 1987, a taxpayer takes possession of and uses eligible property for which the taxpayer makes no payment in 1987, but for which the taxpayer will make full payment in 1988. The taxpayer does in fact pay the entire purchase price for the property in 1988. The property shall be considered to have been purchased and placed in service in 1987 and thereby is not eligible for the credit. (f) Examples. Subsections (b), (c), and (d) are illustrated as follows: Example 1. Taxpayer A is in the business of selling tractors. In 1987, A purchases tractors and holds them as inventory. In 1988, A sells tractors to Taxpayers B and C, both of whom use the tractors in their businesses which are located in Hawaii. B is in the business of landscaping and INCOME TAX LAW §18-235-110.7-11 235- 147 (Unofficial Compilation as of 12/31/2025) C is in the business of roofing. Assume that the tractors qualify as eligible property in the hands of B and C (i.e., new section 38 property). The sales to B and C are subject to the imposition and payment of tax at the rate of four per cent under chapter 237, HRS. A and B are not related parties. A and C are related parties (i.e., C is a wholly owned subsidiary of A). In this case, assuming that B files a timely claim for the credit on the tractor purchase, B is eligible to receive a credit—B purchases eligible property; the purchase of the eligible property results in a transaction which is subject to the imposition and payment of tax at the rate of four per cent under chapter 237, HRS; and the eligible property is purchased and placed in service within Hawaii after December 31, 1987. C, on the other hand, is not eligible to receive a credit for the tractor—while C’s purchase of eligible property results in the imposition and payment of tax at the rate of four per cent under chapter 237, HRS, the tractor is not considered to be purchased and placed in service since the tractor was owned during 1987 by a related person (i.e., A). Example 2. Taxpayer A is in the business of selling flowers. In 1987, A purchases tractors for use in the flower business. A does not hold the tractors as inventory since A is not in the business of selling tractors. In 1988, A sells the tractors to Taxpayer B and C. B is in the business of landscaping and C is in the business of roofing. Assume that the tractors qualify as eligible property in the hands of B and C (i.e., used section 38 property). The sales to B and C are not subject to the imposition and payment of tax at the rate of four per cent under chapter 237, HRS, because the transactions constitute “casual sales” within the meaning of section 237-1, HRS, which are exempt from general excise taxation. In this case, neither B nor C is eligible to receive a credit for the purchase of the tractors because the tractor sales were not subject to the imposition and payment of tax at the rate of four per cent under chapter 237, HRS. [Eff 1/18/90] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §235-110.7) §18-235-110.7-10 Determination of amount of credit. (a) The amount of credit available is determined by applying the following rates against the basis of eligible property: (1) For calendar years prior to 1988, there is no credit; (2) For calendar year 1988, the rate is three per cent; (3) For calendar years beginning after December 31, 1988, the rate is four per cent; and (4) For taxpayers with fiscal taxable years, the rate is the rate for the calendar year in which the eligible property is placed in service within Hawaii. (b) Limitation on credit for eligible property for which a credit for sales or use taxes paid to another state is allowable under section 238-3(i), HRS. In the case of eligible property for which a credit for sales or use taxes paid to another state is allowable under section 238-3(i), HRS, the amount of capital goods excise tax credit allowable shall not exceed the amount of use tax actually paid under chapter 238, HRS, with regard to the eligible property. [Eff 1/18/90] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §235-110.7) §18-235-110.7-11 Basis of eligible property. (a) In general. The basis of eligible property means the cost of property. (b) “Cost”, defined. Cost of property means the lesser of either: (1) The actual invoice price of eligible property; or (2) The basis from which a deduction is taken under I.R.C. §167 (with respect to depreciation) or under I.R.C. §168 (with respect to ACRS). In either case, the amount under paragraph (1) or (2) must be subject to the imposition and payment of tax at the rate of four per cent under chapter 237 or 238, HRS. (c) New section 38 property. (1) In general. The basis of new section 38 property which has been constructed, reconstructed, or erected for the taxpayer’s use includes that portion of the cost of the property which is (A) placed in service after December 31, 1987, and (B) subject to the imposition and payment of tax at the rate of four per cent under chapter 237 or 238, HRS. The portion of the cost of the property which is placed in service before January 1, 1988, is not eligible for the credit. (2) Whether the cost or other basis of the construction, reconstruction, or erection is attributable to all or part of a property placed in service before or after December 31, 1987, may be determined by engineering estimates or by cost accounting records. (3) In the case of reconstructed property, the cost of property does not include the adjusted basis of the reconstructed property at the time the reconstruction commences. However, after December 31, 1988, the reconstructed property may qualify as used section 38 property (as discussed in section 18-235-110.7-06), and the cost of the property may include the adjusted basis of the reconstructed property at the time the reconstruction commences if the adjusted HRS §235-110.7 HRS §235-110.7 §18-235-110.7-11 INCOME TAX LAW 235- 148 (Unofficial Compilation as of 12/31/2025) basis of the property is subject to the imposition and payment of tax at the rate of four per cent under chapter 237 or 238, HRS. (4) Examples: Paragraphs (1), (2), and (3) are illustrated as follows: Example 1. In 1989, a taxpayer reconditions a machine which the taxpayer constructed and placed in service in 1987. The machine has an adjusted basis of $9,000 in 1987. The cost of materials in the reconditioning process which are subject to the imposition and payment of tax at the rate of four per cent under chapter 237, HRS, is $3,000. The basis of the machine which shall be taken into account to compute the amount of credit for 1989 is $3,000, regardless of whether the materials used for reconditioning are new in use. Example 2. A machine with a total cost of $100,000 is placed in service after December 31, 1987. The cost of materials attributable to construction by the taxpayer and which is subject to the imposition and payment of tax at the rate of four per cent under chapter 237, HRS, is $30,000. In this case, the $30,000 amount shall be taken into account by the taxpayer as the basis to determine the amount of credit allowable for the new section 38 property. (5) Constructed, reconstructed, or erected property which is placed in service over a span of more than one taxable year. If constructed, reconstructed, or erected property, qualifying as eligible property, is placed in service over a span of more than one taxable year, the credit shall be allowed to the taxpayer for a particular taxable year with respect to so much of the eligible property that is (A) placed in service after December 31, 1987, and (B) subject to the imposition and payment of tax at the rate of four per cent under chapter 237 or 238, HRS, in that taxable year. (6) Example. Paragraph (5) is illustrated as follows: In 1988, X Corporation enters into a long-term contract with Y Corporation, a builder, to construct energy properties. Assume that the energy properties qualify as eligible properties. Assume further that in 1988, (1) 25 per cent of the eligible properties are placed in service, and (2) subject to the imposition and payment of tax at the rate of four per cent under chapter 237, HRS. In 1988, X is allowed a credit with respect to the eligible properties which are placed in service and for which a tax at the rate of four per cent is imposed and paid under chapter 237, HRS. For succeeding taxable years, X is allowed an additional credit for the additional percentages of the eligible properties which are placed in service and for which a tax at the rate of four per cent under chapter 237, HRS, is imposed and paid as of the close of that subsequent taxable year. (d) Used section 38 property. The basis of used section 38 property is the cost of the property which is subject to the imposition and payment of tax at the rate of four per cent under chapter 237 or 238, HRS. The dollar limitations on the cost of used section 38 property as stated in I.R.C. §48(c)(2)(A), (B), (C), or (D), as amended as of December 31, 1984, do not apply for purposes of the credit. (e) Basis for eligible property of a partnership, S corporation, estate, or trust. In the case of a partnership, S corporation, estate, or trust, the credit allowable is for eligible property which is placed in service by the entity. The basis upon which the credit is computed is determined at the entity level. Each partner, S corporation shareholder, or beneficiary of an estate or trust shall separately take into account for its taxable year with or within which the entity’s taxable year ends, the partner’s, shareholder’s, or beneficiary’s share of the basis and resulting credit. A partner’s share of the basis shall be determined in accordance with the ratio (in effect on the date on which the eligible property is placed in service) in which the partners divide the general profits of the partnership. The basis of partnership eligible property which is subject to a special allocation that is recognized under I.R.C. §704(a) and 704(b) (with respect to partner’s distributive share), shall be recognized for purposes of the credit, and an upward basis adjustment pursuant to I.R.C. §754 (regarding manner of electing optional adjustment to basis of partnership property) is not eligible for the credit. A basis adjustment under I.R.C. §754 is not eligible for the credit because the adjustment is not a transaction which is subject to the imposition and payment of tax at the rate of four per cent under chapter 237 or 238, HRS. Each S corporation shareholder’s basis of eligible property is the shareholder’s allocated share of the corporation’s basis in the eligible property. A beneficiary’s share of the basis is apportioned between the entity and the beneficiaries, based on the income of the entity allocable to each on the date the eligible property is placed in service. The term “beneficiary” includes an heir, legatee, or devisee. (f) Examples. Subsection (e) is illustrated as follows: Example 1. Partnership ABCD places in service on January 1, 1988, and September 1, 1988, items of eligible property. Partnership ABCD and each of its partners report income on the INCOME TAX LAW §18-235-110.7-11 235- 149 (Unofficial Compilation as of 12/31/2025) calendar year basis. Partners A, B, C, and D share partnership profits equally. Each partner’s share of the basis of each eligible property which was placed in service by partnership ABCD is 25 per cent, and each partner’s credit is 25 per cent of the total credit allowable for the eligible property. Example 2. Assume the facts as in example 1 and the following additional facts. Partner A dies on June 30, 1988, and partner B purchases partner A’s interest as of that date. Each partner’s share of the profits from January 1, to June 30, is 25 per cent. From July 1, to December 31, B’s share of the profits is 50 per cent, and partners C and D’s share of the profits is 25 per cent each. For partner A’s last taxable year (i.e., January 1, to June 30, 1988), partner A’s share of the basis and resulting credit for eligible property which was placed in service on January 1, is 25 per cent. Partner B shall take into account 25 per cent of the basis and resulting credit for eligible property which was placed in service on January 1, and 50 per cent of the basis of the eligible property which was placed in service on September 1. Partners C and D shall each take into account 25 per cent of the basis and resulting credit for each eligible property which was placed in service by the partnership in 1988. (g) Basis limitation if a deduction is taken under I.R.C. §179. If a deduction is taken under I.R.C. §179 (regarding an election to expense certain depreciable business assets), the portion of the basis of property for which the deduction is taken is not considered in determining the amount of credit allowable. (h) Example. Subsection (g) is illustrated as follows: A taxpayer purchases section 179 property (as defined in I.R.C. §179(d)) for $5,000. The taxpayer elects to treat $2,000 of the cost of the property as an expense under I.R.C. §179(d). In this case, the taxpayer shall only be allowed to compute the credit on a basis of $3,000 ($5,000 -$2,000). (i) Basis limitation for automobiles. For purposes of determining the amount of credit available, the basis for passenger automobiles used predominantly (over fifty per cent) for business purposes is limited to $11,250. (1) The limit applies to four-wheeled vehicles rated at six thousand pounds or less which are manufactured principally for use on public roads. The limit does not apply to an ambulance, hearse, truck, van, or other vehicle used directly in the trade or business of transporting persons or property for compensation or hire. (2) This limitation applies prior to any percentage reduction for personal use (as discussed in section 18-235-110.7-11(j)). (3) If more than one taxpayer have an interest in a passenger automobile, they are treated as one taxpayer for purposes of the basis limitation. The limitation is to be apportioned among the taxpayers according to their interests in the automobile. (4) Examples. Subsection (i) is illustrated as follows: Example 1. A calendar-year taxpayer places in service a $20,000 passenger automobile for business use in taxable year 1989. The maximum credit allowable in this case is $450 ($11,250 x 4%). Example 2. If the taxpayer in example 1 uses the automobile for personal purposes 25 per cent of the time in the year the automobile is placed in service, the maximum credit allowable is $337.50 ($11,250 x 75% x 4%). (j) Basis limitation for listed property which does not satisfy the more-than-fifty per cent business use test. Listed property will not be treated as eligible property, and the credit is denied if the listed property does not satisfy the more-than-fifty per cent business use test. (1) “Listed property”, defined. Listed property is generally defined as passenger automobiles and other property used as a means of transportation; property generally used for purposes of entertainment, recreation, or amusement; computers and related peripheral equipment; and other property as determined by the department. (2) “The more-than-fifty per cent business use test”, defined. The more-than-fifty per cent business use test requires that certain business use of listed property (referred to as qualified business use) exceeds fifty per cent. (A) “Qualified business use”, defined. For purposes of determining the more-than-fifty per cent business use test, use in a trade or business does not include use in an investment or other activity conducted for the production of income. However, if the more-than- §18-235-110.7-12 INCOME TAX LAW 235- 150 (Unofficial Compilation as of 12/31/2025) fifty per cent business use test has been met, the percentage of investment use may be added in when figuring the total business use for purposes of calculating the amount of credit allowable. (B) Examples. Subparagraph (A) is illustrated as follows: Example 1. The taxpayer places in service in 1989, listed property that is used 45 percent for qualified business use and 55 per cent for investment purposes. In this case, since the qualified business use does not satisfy the more-than-50 per cent business use test, no credit is allowable. Example 2. A calendar year taxpayer places in service in 1989, listed property with a cost of $5,000. The listed property is used 55 per cent for qualified business use, 35 per cent for investment activities, and 10 per cent for personal purposes. In this case, since the more-than-50 per cent business use test has been met, the percentage of investment use may be added in when figuring the total business use for purposes of calculating the amount of credit allowable. The credit is thereby determined and allowed on 90 per cent (55% + 35%) of the basis which is the combined business use. The credit allowable is $180 (90% x $5,000 x 4%). (3) If the qualified business use satisfies the more-than-fifty per cent business use test, but is not used one hundred per cent for business, the amount of credit is limited to the percentage of business use. (4) Example. Paragraph (3) is illustrated as follows: A listed property is used 60 per cent for business and is otherwise eligible for the credit. In this case, the taxpayer is allowed to determine the amount of credit based on only 60 percent of the basis. (5) The amount of credit allowable in the taxable year in which the listed property is placed in service is unaffected by any increase in the business use percentage in a subsequent year. However, if there is a reduction in the business use of property, then the credit taken with respect to the listed property may be subject to recapture (as discussed in section 18-235- 110.7-15(b)). [Eff 1/18/90] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §235-110.7) §18-235-110.7-12 Amount of credit allowable and claimed is treated as a taxable income item, or the basis of eligible property for depreciation or ACRS purposes is reduced by the amount of credit allowable and claimed. The taxpayer shall treat the amount of credit allowable and claimed as a taxable income item for the taxable year in which it is properly recognized under the method of accounting used to compute taxable income. Alternatively, the basis of eligible property for depreciation or ACRS purposes for state income taxes shall be reduced by the amount of credit allowable and claimed. [Eff 1/18/90] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §235-110.7) §18-235-110.7-13 Recapture of credit under section 235-110.7, HRS. (a) In general. Subject to exceptions as discussed in section 18-235-110.7-16, a recapture rule applies to recompute previously taken credit if eligible property is disposed of or otherwise ceases to be eligible property within the recapture period. The recapture rule is limited to the statements in sections 18-235-110.7-01 to 18-235-110.7-22. See section 18-235-110.7-15 for a discussion of when property ceases to be eligible property. (b) “Recapture period”, defined. The term recapture period means the period beginning on the first day of the month the eligible property is placed in service, and extending for a full three years. (c) Recomputation. The credit is recomputed by multiplying the previously taken credit by a recapture percentage, and there should be taken into account any prior recapture determination in connection with the same property. (d) Recaptured amount treated as increase in income tax. An increase in income tax as a result of credit recapture shall be treated as income tax imposed on the taxpayer by chapter 235, HRS, for the recapture year. This is the rule notwithstanding that absent the recapture event, the taxpayer has no income tax liability, has a net operating loss, or no income tax return is otherwise required for the taxable year. [Eff 1/18/90] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §235-110.7) §18-235-110.7-14 Recapture percentage. (a) The following table determines the recapture percentage. HRS §235-110.7 HRS §235-110.7 HRS §235-110.7 INCOME TAX LAW §18-235-110.7-15 235- 151 (Unofficial Compilation as of 12/31/2025) Recapture period: If the recovery property or depreciable property ceases to be eligible property within: The recapture percentage is: (i) One full year after placed in service 100% (ii) One full year after the close of the period described in clause (i) 66% (iii) One full year after the close of the period described in clause (ii) 33% (iv) One full year after the close of the period described in clause (iii), and thereafter -0- (b) Example. Subsection (a) is illustrated as follows: On June 15, 1989, calendar-year taxpayer A places in service eligible property with a basis of $10,000. The asset is used entirely for business purposes. The amount of credit allowable and taken in taxable year 1989 is $400 ($10,000 x 4%). On June 16, 1991, A sells the asset. In taxable year 1991, A must recapture $132 [[($10,000 x 100% x 4%) - ($10,000 x 0% x 4%)] x 33%] of the previously taken credit. The 33% recapture percentage is based on a recapture period which begins on June 1, 1989 (i.e., the first day of the month within which the eligible property was placed in service), and the date the property ceases to be eligible property (i.e., June 16, 1991). [Eff 1/18/90] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §235-110.7) §18-235-110.7-15 Recapture event (i.e., property ceases to be eligible property). (a) In general. Property ceases to be eligible property with respect to a taxpayer: (1) As a result of the occurrence of an event on a specific date (e.g., a sale, transfer, retirement, gift, distribution, or other disposition). The cessation shall be treated as having occurred on the actual date of the event; or (2) For any reason other than the occurrence of an event on a specific date (e.g., the property is used predominantly in connection with the furnishing of lodging during the taxable year and does not fall within one of the exceptions; decrease in business use of listed property). The cessation shall be treated as having occurred on the first day of the taxable year. (b) Decrease in the business use of listed property to less than fifty percent. During the recapture period, all or a portion of the credit taken in an earlier year for listed property may be subject to recapture if: (1) the percentage of business use falls below the percentage of business use for the year the listed property was placed in service; or (2) the listed property is converted from business use to personal use and does not satisfy the more-than-fifty per cent business use test. The terms “listed property” and “the more-than-fifty per cent business use test” are defined in section 18-235-110.7-11(j). (c) Example. Subsection (b) is illustrated as follows: A, a calendar-year taxpayer, places in service on January 15, 1988, listed property (i.e., automobile) for $7,000. In 1988, A uses the automobile 75 percent for business, 15 percent for the production of income, and 10 per cent for personal use. For taxable year 1988, A claims a credit in the amount of $189 ($7,000 x 90% x 3%). In 1989, A uses the automobile 60 per cent for business, 15 per cent for the production of income, and 25 per cent for personal use. The increased personal use triggers partial recapture of the credit of $20.79 [[($7,000 x 90% x 3%) -($ 7,000 x 75% x 3%)] x 66%]. In 1990, A uses the automobile 50 per cent for business, 25 per cent for the production of income, and 25 per cent for personal use. Although recapture is not required on the basis that the percentage of personal use remains the same in taxable years 1989 and 1990, I.R.C. §280F, which is adopted by section 235-110.7(d), HRS, requires recapture because the automobile ceases to be eligible property for failure to satisfy the more-than-50 per cent business use test. Accordingly, A must recapture a further $51.98 [[($7,000 x 75% x 3%) -($7,000 x 0% x 3%)] x 33%]. (d) Decrease in basis of eligible property. During the recapture period, all or a portion of previously taken credit may be subject to recapture as a result of a cessation such as a decrease in the basis of eligible property (either through a refund in purchase price or usage of the property for personal purposes). (e) Example. Subsection (d) is illustrated as follows: A, a calendar-year taxpayer, places in service on January 1, 1988, property, which is not listed property, with a basis of $20,000. In taxable year 1988, A uses the property 80 per cent for business, and 20 per cent for personal purposes. Thus, for taxable year 1988, only 80 per cent, or $16,000 ($20,000 x 80%) of the basis of the asset qualifies as eligible property. The credit HRS §235-110.7 §18-235-110.7-15 INCOME TAX LAW 235- 152 (Unofficial Compilation as of 12/31/2025) allowable in 1988 is $480 ($16,000 x 3%). In taxable year 1989, A uses the asset 60 per cent for business, and 40 per cent for personal purposes. The increased personal use triggers partial recapture of the credit in taxable year 1989 of $79.20 [[($20,000 x 80% x 3%) - ($20,000 x 60% x 3%)] x 66%]. (f) Partnership, S corporation, estate, or trust. (1) In general. In the case of a partnership, S corporation, estate, or trust, the recapture rule applies to a partner, shareholder, or beneficiary who originally received the benefit of a credit if within the recapture period: (A) the S corporation, partnership, estate, or trust disposes of eligible property (or if eligible property otherwise ceases to be eligible property in the hands of the entity); or (B) the partner’s, shareholder’s, or beneficiary’s interest in the entity is reduced (for example, by a sale of the partner’s, shareholder’s, or beneficiary’s interest in the entity) below a specified percentage. See section 18-235-110.7-16 for exceptions to the recapture rule for transfers by reason of death of a partner, and a downward basis adjustment pursuant to I.R.C. §754 (regarding manner of electing optional adjustment to basis of partnership property). (2) “Specified percentage”, defined. The term specified percentage is defined by the following two rules: (A) 66 2/3 per cent rule; and (B) 33 1/3 per cent rule. (3) “66 2/3 per cent rule”, defined. The 66 2/3 per cent rule means that if a partner’s, shareholder’s, or beneficiary’s interest in the entity is reduced below 66 2/3 per cent of its interest at the time the credit was taken, a pro rata share of the partner’s, shareholder’s, or beneficiary’s interest in the entity’s eligible property will cease to be eligible property with respect to the partner, shareholder, or beneficiary, and credit recapture will be required. (4) “33 1/3 per cent rule”, defined. The 33 1/3 per cent rule means that once there has been a recapture by reason of the 66 2/3 per cent rule, there is no further recapture until the partner’s, shareholder’s, or beneficiary’s interest is reduced to less than 33 1/3 per cent of its interest at the time the credit was taken. Thereafter, any reduction in interest, however small, will again subject the partner, shareholder, or beneficiary to the recapture provisions. (5) Prior recapture determination. In making a recapture determination, there should be taken into account any prior recapture determination made with respect to the partner, shareholder, or beneficiary in connection with the same property. (6) Example. Paragraphs (1) to (5) are illustrated as follows: Example 1. General Facts. Corporation S, a calendar year S corporation, places in service on June 1, 1988, the following three items of eligible property: Asset number Basis 1 ........................... $30,000 2 ........................... $30,000 3 ........................... $30,000 On December 31, 1988, Corporation S has 200 shares of stock outstanding which are owned equally by shareholders A and B, calendar year taxpayers. The total basis of the three eligible properties are apportioned to shareholders A and B as follows: Total basis ......................... $90,000 Shareholder A (100/200) .. $45,000 Shareholder B (100/200) .. $45,000 In taxable year 1988, each shareholder takes a credit of $450 ($15,000 x 3%) for each of the three eligible properties, or a total credit of $1,350 ($15,000 x 3% x 3). Example 2. Assume the facts as in Example 1 and the following fact. On December 21, 1989, Corporation S sells asset No. 3 to Corporation X. For taxable year 1989, shareholders A and B must each recapture $297 ($450 x 66%) of their previously taken credit. Corporation X will not be subject to recapture because it never benefited from the credit. INCOME TAX LAW §18-235-110.7-15 235- 153 (Unofficial Compilation as of 12/31/2025) Example 3. Assume the facts as in Example 1 and the following fact. On November 11, 1990, shareholder A sells 50 of A’s 100 shares to C. As a result, 50 per cent of A’s share of the basis of each of the three eligible properties cease to be eligible properties with respect to A since immediately after the sale, A’s proportionate interest in Corporation S is reduced to 50 per cent of A’s interest at the time the credit was taken. For taxable year 1990, A must recapture $222.75 ($1,350 x 50% x 33%). Example 4. Assume the facts as in Examples 1 and 3, and the following fact. On September 1, 1991, shareholder A disposes of 10 more shares to E, leaving A with 40 of A’s original 100 shares. The sale in 1991 does not trigger recapture for A because of the 33 1/3 per cent rule—since A was subject to recapture by reason of a reduction in interest below 66 2/3 per cent (i.e., 50 per cent) in 1990, A experiences no further recapture until A’s interest is reduced to less than 33 1/3 per cent of A’s original interest. The sale in 1991 reduces A’s interest to only 40 per cent. E will not be subject to recapture. Example 5. Assume the facts as in Example 1 and the following fact. On November 11, 1990, shareholder A sells 15 of A’s 100 shares to D. The sale does not trigger recapture for A because of the 66 2/3 per cent rule—A’s interest in Corporation S has not been reduced below 66 2/3 per cent of A’s interest at the time the credit was taken. This result occurs despite the fact that A now owns only 85 per cent of A’s original stock interest. D will not be subject to recapture. (7) S corporation election. (A) In general. If a C corporation makes a valid election under section 235-2.4, HRS, to be an S corporation, then on the last day of the taxable year immediately preceding the first taxable year for which the election is effective, any eligible property the basis of which was taken into account to compute the C corporation’s credit allowable in taxable years prior to the first taxable year for which the election is effective (and which has not been disposed of or otherwise ceased to be eligible property with respect to the C corporation prior to such last day) shall be considered as having ceased to be eligible property with respect to the C corporation and the recapture rule shall apply. However, the recapture rule shall not apply if the S corporation and each of its shareholders on the first day of the first taxable year for which the election under section 235-2.4, HRS, is to be effective, or on the date of the election, whichever is later, execute an agreement as is described in subparagraph (B). (B) “Agreement”, defined. The agreement shall: (i) be signed by the shareholders; and on behalf of the S corporation by a person who is duly authorized; (ii) state that if eligible property for which the credit was taken is later disposed of by, or ceases to be eligible property with respect to the S corporation during the recapture period and during a taxable year for which the S election is effective, each signer agrees to notify the director of a disposition or cessation; and to be jointly and severally liable to pay the director an amount equal to the increase in tax provided by the recapture rule; (iii) state the name, address, and taxpayer identification number (e.g., social security number) of each party to the agreement; (iv) be filed with the department for the taxable year immediately preceding the first taxable year for which the S election is effective; and (v) be filed with the department on or before the due date (including extensions of time) of the return, unless the director permits, upon a showing of good cause, that the agreement may be filed on a later date. (C) Shareholder’s share of the amount of credit recapture. A shareholder’s share of the amount of credit recapture shall be determined as if the property had ceased to be eligible property as of the last day of the taxable year immediately preceding the first taxable year for which the S election is effective; however, the recapture percentage shall be determined as if the property ceased to be eligible property on the date the property actually ceased to be eligible property. (g) Transfer of eligible property out of Hawaii. During the recapture period, all or a portion of previously taken credit will be subject to recapture if the eligible property is transferred out of the State of Hawaii. (h) Example. Subsection (g) is illustrated as follows: X, a calendar-year taxpayer, places eligible property in service on September 1, 1988. The property has a basis of $10,000 and is used entirely for business purposes. X claims the credit on its 1988 tax return. On June 1, 1989, X transfers the eligible property out-of-state to another §18-235-110.7-16 INCOME TAX LAW 235- 154 (Unofficial Compilation as of 12/31/2025) section of its business operation. The transfer of property out-of-state triggers recapture of the credit in taxable year 1989 of $300 [(10,000 x 3%) x 100%]. [Eff 1/18/90] (Auth: HRS §§231- 3(9), 235-118) (Imp: HRS §235-110.7) §18-235-110.7-16 Exceptions to the recapture rule. (a) Transfer by reason of death. A transfer by reason of death is not considered to be a disposition of eligible property, subject to the recapture rule. This exception to the recapture rule applies to transfers by reason of death of a sole proprietor, partner, S corporation shareholder, or beneficiary of an estate or trust. (b) Example. Subsection (a) is illustrated as follows: A, a calendar-year taxpayer, places in service in 1988, eligible property with a basis of $5,000. In 1988, A takes a credit in the amount of $150 ($5,000 x 3%). A dies in 1989, and the property is transferred to A’s heir. In 1989, no credit is required to be recaptured. Further, the heir can immediately dispose of the property without the possibility of credit recapture. (c) Transaction to which I.R.C. §381(a) applies. A disposition of eligible property in a transaction to which I.R.C. §381(a) (with respect to carryovers in certain corporate acquisitions) applies is not considered to be a disposition of eligible property, subject to the recapture rule. However, if the acquiring corporation disposes of the eligible property before the close of the recapture period, there will be an early disposition and the recapture rule will be triggered. (d) Mere change in form of conducting a trade or business. (1) In general. Recapture is not required as a result of a mere change in the form of conducting a trade or business if: (A) the property is retained as eligible property in the same trade or business; (B) the transferor (or in a case where the transferor is a partnership, estate or trust, or S corporation, the partner, beneficiary, or shareholder) of eligible property retains a substantial interest in the trade or business; (C) substantially all the property (whether or not eligible property) necessary to operate the trade or business is transferred in the change of form; and (D) the basis of eligible property in the hands of the transferee is determined in whole or in part by reference to the basis of eligible property in the hands of the transferor (i.e., carryover basis). (2) Paragraph (1) shall not apply to the transfer of eligible property if I.R.C. §381 (regarding carryovers in certain corporate acquisitions) applies to the transfer. (3) “Substantial interest”, defined. For purposes of this exception, a transferor (or in a case where the transferor is a partnership, estate or trust, or S corporation, the partner, beneficiary, or shareholder) is considered to have retained a substantial interest in the trade or business if, after the change in form, the transferor’s interest in the trade or business is: (A) substantial in relation to the total income interest of all the owners; or (B) equal to or greater than the transferor’s interest prior to the change in form. A taxpayer will not be considered to have retained a substantial interest where the only basis for claiming substantial interest is that the values of the interests exchanged are equal. (A) Examples. Paragraph (3) is illustrated as follows: Example 1. A taxpayer owns a five per cent interest in a partnership. After an incorporation of the partnership, the taxpayer retains at least a five per cent interest in the corporation. In this case, the taxpayer will be considered to have retained a substantial interest in the business as of the date of the change in form. Example 2. A taxpayer exchanges a 48 per cent partnership interest for a seven per cent interest in a corporation (seven per cent of the outstanding stock), contending that the values of the interests exchanged are equal. In this case, the taxpayer will not be considered to have retained a substantial interest. (B) The determination of whether a taxpayer has retained a substantial interest in the trade or business is to be made immediately after the change in the form of conducting the trade or business, and after each time the taxpayer disposes of a portion of the taxpayer’s interest in the new enterprise. (4) S Corporation. Neither an election to be treated as an S corporation, nor a termination or loss of S corporation status automatically triggers recapture. However, recapture may result if either of the recapture events discussed in paragraph (5) occurs. In determining whether a reduction in a shareholder’s interest (for example, by a sale of stock) will result in recapture, HRS §235-110.7 INCOME TAX LAW §18-235-110.7-21 235- 155 (Unofficial Compilation as of 12/31/2025) the 66 2/3 per cent and 33 1/3 per cent rules (as discussed in section 18-235-110.7-15(f)) apply even if the corporation is no longer an S corporation. (5) Disposition or cessation. Property ceases to be eligible property with respect to a transferor (or in a case where the transferor is a partnership, estate or trust, or S corporation, the partner, beneficiary, or shareholder), and the transferor must make a recapture determination if during the recapture period: (A) the transferee disposes of eligible property (or if eligible property otherwise ceases to be eligible property in the hands of the transferee); (B) the transferor (or in a case where the transferor is a partnership, estate or trust, or S corporation, the partner, beneficiary, or shareholder) does not retain a substantial interest in the trade or business directly or indirectly (through ownership in other entities provided that the other entities’ bases in the interests are determined in whole or in part by reference to the bases of the interests in the hands of the transferor). (6) Recordkeeping. A taxpayer who seeks to establish the taxpayer’s interest in a trade or business under this subsection must maintain adequate records to demonstrate the taxpayer’s direct or indirect interest, or both, in the trade or business after any transfer. (e) Transfer between spouses or incident to divorce. (1) In general. A transfer between spouses or incident to divorce is not considered to be a disposition, subject to the recapture rule. (2) Subsequent to a transfer between spouses or incident to divorce, a disposition by the transferee during the recapture period may result in recapture to the same extent as if the disposition had been made by the transferor at that later date. (3) Paragraphs (1) and (2) apply to transfers made after December 31, 1987, in taxable years ending after December 31, 1987. It does not apply to transfers under an instrument in effect before January 1, 1988. (f) Property destroyed by casualty. The recapture rule shall not apply to eligible property which is disposed of or otherwise ceases to be eligible property with respect to the taxpayer as a result of its destruction or damage by fire, storm, shipwreck, or other casualty, or theft. (g) Downward basis adjustment pursuant to I.R.C. §754 (regarding manner of electing optional adjustment to basis of partnership property). In the case of a partnership, a downward basis adjustment pursuant to I.R.C. §754 is not subject to recapture because the use of the property is not considered to be terminated for purposes of the credit. [Eff 1/18/90] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §235-110.7) §18-235-110.7-17 Recapture limitation. An increase in income tax due to recapture is limited to the total credit claimed. [Eff 1/18/90] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §235-110.7) §18-235-110.7-18 Refund. The credit is deductible from the taxpayer’s net income tax liability for the year in which it qualifies. If the credit exceeds the taxpayer’s net income tax liability, the excess of credit over liability shall be refunded to the taxpayer; however, no refund on account of the credit shall be made for an amount less than $1. [Eff 1/18/90] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §235-110.7) §18-235-110.7-19 Carryback and carryover of credit. There shall be no carryback or carryover of excess credit over liability. [Eff 1/18/90] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §235-110.7) §18-235-110.7-20 Filing procedure. (a) In general. A claim for the credit, including an amended claim, must be filed on or before the end of the twelfth month following the close of the taxable year for which the credit may be claimed, or if an extension of time for filing a return has been granted, within the extension period. (b) Form. The claim for the credit shall be made on Form N-312. For recapture purposes, a recomputation of the credit shall be made on Part II of Form N-312. (c) Failure to comply with filing requirements. A failure to comply with these filing requirements shall constitute a waiver of the right to claim the credit. (d) Partner, S corporation shareholder, or beneficiary of an estate or trust. In the case of a taxpayer who is involved in a pass-through entity (i.e., partnership, S corporation, estate, or trust) and who claims a credit for the entity’s eligible property, the taxpayer shall attach to Form N-312, a copy of the Schedule K-1 and any other statement (relating to the credit) which is provided by the pass-through entity. A copy of the Schedule K-1 and other statement shall be attached to Form N-312 both when the credit is claimed, and when the credit is subject to recapture. [Eff 1/18/90] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §235-110.7) §18-235-110.7-21 Identification of property. (a) In general. A taxpayer must maintain records from which the taxpayer can establish, with respect to each item of eligible property, the following facts: (1) The month and the taxable year in which the property was placed in service; HRS §235-110.7 HRS §235-110.7 HRS §235-110.7 HRS §235-110.7 HRS §235-110.7  §18-235-110.7-22 INCOME TAX LAW 235- 156 (Unofficial Compilation as of 12/31/2025) (2) The basis of the property; (3) The estimated useful life or recovery period that was assigned to the property to determine eligibility for the credit; and (4) The date the property is disposed of or otherwise ceases to be eligible property. The above stated facts will be analyzed to determine both the eligibility for the credit, and the necessity for any recapture of credit. (b) Insufficient records. For recapture purposes, if the taxpayer’s records are insufficient to establish the above stated facts, it will generally be assumed that the most recently acquired eligible property was disposed of first. (c) Mass assets. Where the maintenance of records of details on mass assets is impractical, the taxpayer may adopt reasonable recordkeeping practices, consonant with good accounting practices and consistent with the taxpayer’s prior recordkeeping practices. Mass assets means a mass or group of individual items of property (A) not necessarily homogeneous, (B) each of which is minor in value relative to the total value of the mass or group, (C) numerous in quantity, (D) usually accounted for only on a total dollar or quantity basis, and (E) with respect to which separate identification is impracticable. Examples include portable air and electric tools, jigs, and hardware. (d) Taxpayer uses an averaging convention to compute depreciation for eligible property. A taxpayer’s use of an averaging convention to compute depreciation for eligible property will be recognized to determine if recapture is required for a particular property. (1) “Averaging convention”, defined. The averaging convention provides for assumed dates that property is placed in service, or ceases to be eligible property. For example, it might be assumed that all additions and retirements made during the first half of a given year were made on the first day of that year, and that all additions and retirements during the second half of that year were made on the first day of the following year. (2) The taxpayer must consistently use the assumed dates to compute the recapture of credit for all eligible property depreciated under the taxpayer’s averaging convention. In any event, however, the director may disregard the taxpayer’s use of the averaging convention dates if the use results in a substantial distortion of eligibility for the credit. [Eff 1/18/90] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §235-110.7) §18-235-110.7-22 Banks and other financial corporations. Sections 18-235-110.7-01 to 18-235- 110.7-21 shall apply to banks and other financial corporations. [Eff 1/18/90] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §235-110.7)