HAR §18-235-2.3. Conformance to the federal Internal Revenue Code

(a) In general. (1) In order to permit a proper administration of the Hawaii net income tax law which by Act 62, S.L.H. 1979, adopted by reference various provisions of the federal Internal Revenue Code, as amended as of December 31, 1979, the director of taxation finds it desirable to establish and publish income tax rules and regulations, conforming to the requirements of chapter 91, HRS. When promulgated as required by law, these rules and regulations have the force and effect of law under chapter 235, HRS, and any other chapters which contain provisions relating to chapter 235. The law and regulations must be read together, because the regulations relating to a particular section of the law do not necessarily cover every point in the section. (2) Scope. These rules and regulations are promulgated to: (A) Adopt the Federal Tax Regulations relating to subtitle A, Chapters 1 and 6 of the Internal Revenue Code of 1954 as amended as of December 31, 1978, set forth in this regulation. (B) List the inoperative sections of the Internal Revenue Code. The related federal regulations to these Internal Revenue Code sections shall also be inoperative. (C) As provided by section 235-2.3 (c) to (m), HRS, certain Internal Revenue Code sections, subsections, parts of subsections, and federal Public Law that do not apply or that are otherwise limited in application also shall apply to the related federal regulations as contained in this regulation. (3) Adoption of federal tax regulations. The regulations relating to those sections of subtitle A, Chapters 1 and 6, Internal Revenue Code of 1954, as amended as of December 31, 1978, adopted by section 235-2.3, HRS, which are contained in the Federal Tax Regulations 1979 (Title 26, Internal Revenue, 1954 Code of Federal Regulations), with amendments and adoptions to January 1, 1979, and which are not in conflict with provisions contained in chapters 235, 231, or 232, Hawaii Revised Statutes, are hereby adopted by reference and HRS §235-1 HRS §235-1 HRS §235-1 HRS §235-2.3 §18-235-2.3 INCOME TAX LAW 235- 16 (Unofficial Compilation as of 12/31/2025) made a part of the rules and regulations of the department of taxation, as they apply to the determination of gross income, adjusted gross income, ordinary income and loss, and taxable income, except insofar as the regulations pertain to provisions of the Internal Revenue Code and federal Public Law, which pursuant to chapter 235, HRS, and this regulation, do not apply or are otherwise limited in application. Provisions in this regulation in conflict with those sections of the Internal Revenue Code, the Federal Regulations or the federal Public Law shall be limited as provided under section 235-2.3(n), HRS. (b) Inoperative federal tax regulations. The federal regulations relating to the following Internal Revenue Code subchapters, parts of subchapters, sections, subsections, and parts of subsections shall not be operative for the purposes of HRS chapter or this regulation unless otherwise provided. (See section 235-2.3(b), HRS.) Subchapter Section of I.R.C. A 1 to 58 B 78, 103, 116, 120, 122, 151, 169, 241 to 250 (except 248 and 249), 280C C 367 E 457 F 501 to 528 (except 512 to 515) G 531 to 565 H 581 to 596 J 642(a), (b), (d), 668 L 801 to 844 M 853 N 861 to 999 O 1055, 1057 P 1201 Q 1301 to 1351 T 1381 to 1388 (c) Zero bracketing. The federal regulations relating to the determinations, provisions, and requirements to zero-bracket amounts in the amendments to the Internal Revenue Code by Public Law 95-30, sections 101 and 102 (with respect to change in tax rates and tax tables to reflect permanent increase in standard deduction and change in definition of taxable income to reflect change in tax rates and tables) shall not be operative. (See section 235-2.3(c), HRS.) (d) Standard deduction; individuals not eligible for standard deduction and election of standard deduction. (I.R.C. Sections 141, 142, 144). As provided by section 235-2.3(d), HRS, Internal Revenue Code Sections 141, 142, and 144 shall be operative as of June 7, 1957, as amended as of that date. The federal regulations relating to these Internal Revenue Code sections shall be inoperative for this State. The standard deduction as adopted by the State allows individuals to itemize or to elect to take a 10 per cent standard deduction, but not both. (1) Standard deduction. IRC Section 141, as amended, as of June 7, 1957, provides as follows: “Sec. 141. Standard deduction. The standard deduction referred to in section 63(b) (defining taxable income in case of individual electing standard deduction) shall be an amount equal to 10 per cent of the adjusted gross income or $1,000, whichever is the lesser, except that in INCOME TAX LAW §18-235-2.3 235- 17 (Unofficial Compilation as of 12/31/2025) the case of a separate return by a married individual the standard deduction shall not exceed $500.” In the case of a joint return, there is only one adjusted gross income and only one standard deduction. The standard deduction is $1,000 or 10 per cent of the combined adjusted gross income, whichever is the lesser. Example: If a husband has an income of $15,000 and his spouse has an income of $12,000 for the taxable year for which they file a joint return, and they have no deductions allowable for the purpose of computing adjusted gross income, the adjusted gross income shown by the joint return is the combined income of $27,000, and the standard deduction is $1,000 and not $2,000. (2) Eligibility. (A) IRC Section 142, as amended, as of June 7, 1957, provides as follows: “Sec. 142. Individuals not eligible for standard deduction. (a) Husband and wife.—The standard deduction shall not be allowed to a husband or wife if the tax of the other spouse is determined under section 1 on the basis of the taxable income computed without regard to the standard deduction. (b) Certain other taxpayers ineligible.—The standard deduction shall not be allowed in computing the taxable income of— (1) a nonresident alien individual; (2) a citizen of the United States entitled to the benefits of section 931 (relating to income from sources within possessions of the United States); (3) an individual making a return under section 443(a)(1) for a period of less than 12 months on account of a change in his annual accounting method; or (4) an estate or trust, common trust fund, or partnership.” (B) For the purpose of section 235-2.3(d), HRS, the reference in IRC Section 142(a) to section 1 shall be deemed a reference to section 235-51, HRS. In the case of husband and wife, if the tax of one spouse is determined under section 235-51, HRS, on the basis of the taxable income computed without regard to the standard deduction and, the other spouse may not elect to take the standard deduction. If each spouse files a separate Form N-12 or N-15, both must elect to take the standard deduction or both spouses are denied the standard deduction. If one spouse files Form N-12 or N-15 and does not elect to take the standard deduction, the other spouse may not elect to take the standard deduction and, accordingly, may not compute his tax under the provisions of section 235-53, HRS, or file Form N-13 as his separate return for the taxable year. Example: If A and his wife B, both residents of Hawaii, have gross income of $16,000 and $3,500, respectively, from wages subject to withholding and A files Form N-12 (long form) and does not elect thereon to take the standard deduction, B may not file Form N-13 (short form) but must file Form N-12, taking thereon only her actual allowable deductions and not the standard deduction. In such case, however, if both elect to take the standard deduction, A must file Form N-12 (since his gross income exceeds the amount provided by section 235-53, HRS) but B may file Form N-13, or in the alternative, she may file Form N-12 and compute the tax by using the optional tax table. Under either alternative, effect is given to the standard deduction. (3) Election. (A) IRC Section 144, as amended, as of June 7, 1957, provides as follows: “Sec. 144. Election of standard deduction. (a) Method and effect of election.— (1) If the adjusted gross income shown on the return is $5,000 or more, the standard deduction shall be allowed if the taxpayer so elects in his return, and the Secretary or his delegate shall by regulations prescribe the manner of signifying such election in the return. If the adjusted gross income shown on the return is $5,000 or more, but the correct adjusted gross income is less than $5,000, then an election by the taxpayer under the preceding sentence to take the standard deduction shall be considered as his election to pay the tax imposed by section 3 (relating to tax based on tax table); and his failure to make under the preceding sentence an election to take the standard §18-235-2.3 INCOME TAX LAW 235- 18 (Unofficial Compilation as of 12/31/2025) deduction shall be considered his election not to pay the tax imposed by section 3. (2) If the adjusted gross income shown on the return is less than $5,000, the standard deduction shall be allowed only if the taxpayer elects in the manner provided in section 4, to pay the tax imposed by section 3. If the adjusted gross income shown on the return is less than $5,000, but the correct adjusted gross income is $5,000 or more, then an election by the taxpayer to pay the tax imposed by section 3 shall be considered as his election to take the standard deduction; and his failure to elect to pay the tax imposed by section 3 shall be considered his election not to take the standard deduction. (3) If the taxpayer on making his return fails to signify in the manner provided by paragraph (1) or (2), his election to take the standard deduction or to pay the tax imposed by section 3, as the case may be, such failure shall be considered his election not to take the standard deduction. (b) Change of election. Under regulations prescribed by the Secretary or his delegate, a change of an election for any taxable year to take or not to take, the standard deduction, or to pay, or not to pay, the tax under section 3, may be made after the filing of the return for such year. If the spouse of the taxpayer filed a separate return for any taxable year corresponding, for purposes of section 142(a), to the taxable year of the taxpayer, the change shall not be allowed unless, in accordance with such regulations: (1) The spouse makes a change of election with respect to the standard deduction for the taxable year covered in such separate return, consistent with the change of election sought by the taxpayer; and (2) The taxpayer and his spouse consent in writing to the assessment, within such period as may be agreed on with the Secretary or his delegate, of any deficiency, to the extent attributable to such change of election, even though at the time of the filing of such consent the assessment of such deficiency would otherwise be prevented by the operation of any law or rule of law. This subsection shall not apply if the tax liability of the taxpayer’s spouse, for the taxable year corresponding (for purposes of section 142(a)) to the taxable year of the taxpayer, has been compromised under section 7122.” (B) For the purpose of section 235-2.3(d), HRS, the reference in IRC section 144, to sections 3, 4, and 7122 shall be deemed references to sections 235-53, 52, and 231- 3(10), HRS, respectively. (C) A taxpayer whose adjusted gross income as shown by his return equals to or exceeds the amount provided under section 235-53, HRS, or who otherwise is ineligible to use the optional tax tables but is eligible for the standard deduction (such as a person entitled to the special exemption under section 235-54(c), HRS, shall be allowed the standard deduction if he elects on such return to take such deduction. Such taxpayer shall so signify by claiming on his return the ten per cent standard deduction instead of itemizing the non-business deductions allowed in computing taxable income. (D) A change of election must be made within the period of three years after filing of the return for the taxable year involved, or within three years of the due date prescribed for the filing of said return, whichever is later. (E) The director cannot allow an overpayment credit after expiration for the period of time prescribed in section 235-111, HRS, which limits both credits and assessments of additional taxes. This period of time is not extended by the making of a change of election. (e) Employee annuity. (I.R.C. Section 403). Taxation of employee annuity shall be the same except for the amount of premium withheld from the salary of an employee by the Department of Education and the University of Hawaii for the purchase of an annuity contract under Act 40, S.L.H. 1967. This amount is includible as taxable gross income and subject to the withholding tax provisions of this State. Amendments to I.R.C. Section 403 by Public Law 87-370, section 3 were not adopted by this State. (See section 235-2.3(e), HRS.) (f) Administering pensions, profit sharing, etc. (I.R.C. Section 401 to 415). (1) The Department of Taxation shall follow the applicable provisions set forth in the federal tax regulations in respect to related provisions of I.R.C. Sections 410 to 415. (2) Records substantiating (i) all data and information on returns (as defined in I.R.C. Section 6103 (b) required on all forms and reports, (ii) authenticated copies of the federal returns filed relating to pensions, profit sharing, stock bonus and other retirement plans, (iii) INCOME TAX LAW §18-235-2.3 235- 19 (Unofficial Compilation as of 12/31/2025) assessments made by the Internal Revenue Service, including tax on premature distributions (I.R.C. Section 72(m)(5)) and excise taxes imposed by I.R.C. Sections 4971 to 4975, shall be kept and made available for inspection at the principal place of business of the self- employed individual or the employer maintaining the plan or the plan administrator (defined in I.R.C. Section 414(g)) at all times. (See section 235-2.3(f), HRS). (g) Unrelated business taxable income. (I.R.C. Sections 512 to 515). (1) In general. The federal regulations relating to the taxation of unrelated business taxable income shall apply to the State except that in the computation thereof sections 235-3 to 235- 5, and 235-7 (except subsection (c)), HRS, shall also apply, and any amount of income or deduction which is excluded in computing the unrelated business taxable income shall not be allowed in determining the net operating loss deduction under section 235-7(d), HRS. Any income from a prepaid legal service plan shall not be considered. (See section 235- 2.3(g), HRS). (2) Returns. Every person and organization, described in section 235-9, HRS, which is otherwise exempt from income tax and which is subject to income tax imposed on unrelated business taxable income under section 235-2.3(g), HRS, shall file a return for each taxable year if it has gross income of $1,000 or more included in computing unrelated business taxable income for such taxable year. The filing of a return of unrelated business income does not relieve the person or organization of other filing requirements. (h) With respect to estates and trusts, the following rules apply. (1) With regard to section 641(a) (with respect to tax on estates and trusts), IRC, as operative under chapter 235, HRS, the applicable tax rates are as set forth in section 235-51(d), HRS. (A) If an estate or trust has a net capital gain, the estate or trust may elect the alternative tax set forth in section 235-51(f), HRS. (B) Estates and trusts are not allowed the standard deduction, except that the estate of an individual in bankruptcy shall be allowed the standard deduction in section 235-2.4(a) (4), HRS, pursuant to section 1398(c)(3) (with respect to basic standard deduction in an individual’s title 11 case), IRC, if the estate does not itemize deductions. (C) Estates and trusts shall not use the tax tables to compute tax. (2) Section 642(a) (with respect to foreign tax credit), IRC, is not operative in Hawaii. A resident trust shall be allowed a credit for taxes paid to another jurisdiction to the extent permitted by section 235-55, HRS, and the rules thereunder, but only in respect of so much of those taxes paid to another jurisdiction that is not properly allocable to any beneficiary. A nonresident trust shall not be allowed the credit in section 235-55, HRS. (3) Section 642(b) (with respect to deduction for personal exemption), IRC, is not operative in Hawaii. An estate or trust shall be allowed the deduction for personal exemption set forth in section 235-54(b), HRS. A trust shall be eligible for the personal exemption of $200 under section 235-54(b)(2), HRS, if it is required by the terms of its governing instrument to distribute all of its income currently, whether or not the trust is described in section 651 (with respect to simple trusts), IRC. Example 1: A trust’s governing instrument provides that all of its income is to be distributed to charity every year. Although the trust is not a simple trust under section 651, IRC, it is eligible for the $200 personal exemption. Example 2: A trust’s governing instrument provides that $1000 is to be distributed to its sole beneficiary every year. The trust is eligible for the $200 personal exemption in any year in which the trust’s income is not more than $1000. (4) With regard to section 642(d) (with respect to unlimited deduction for amounts paid or permanently set aside for a charitable purpose), IRC, as operative under chapter 235, HRS, an estate or trust shall be allowed a deduction equal to the smaller of the following two amounts: (A) The amount allowable under section 681 (with respect to limitation on charitable deduction), IRC; or (B) The greater of the amounts in clause (i) and (ii): (i) The amount qualifying under section 642(c), IRC, that is paid, or permanently set aside, to be used exclusively in Hawaii for charitable purposes; or §18-235-2.3 INCOME TAX LAW 235- 20 (Unofficial Compilation as of 12/31/2025) (ii) The amount qualifying under section 642(c), IRC, that is actually paid for charitable purposes, subject to the percentage limitations in section 170(b) (1) (with respect to percentage limitations applicable to contributions by an individual), IRC. In computing the percentage limitations, the contribution base of the estate or trust shall be adjusted gross income as defined in section 235-1, HRS, computed without regard to any net operating loss carryback to the taxable year. (5) Section 642(d) (with respect to net operating loss deduction), IRC, is not operative in Hawaii. An estate or trust shall be allowed the net operating loss deduction to the extent permitted by section 235-7(d), HRS, and the rules thereunder. (6) With respect to section 644 (with respect to gain on property transferred to trust at less than fair market value), IRC, as operative under chapter 235, HRS: (A) In section 644(a)(2)(A), IRC, the tax shall be computed under chapter 235, HRS; and (B) In section 644(a)(2)(B), IRC, the interest rate shall be that specified in section 231- 39(b)(4), HRS. (7) With respect to section 667 (with respect to treatment of amounts deemed distributed by a complex trust in preceding years), IRC, as operative under chapter 235, HRS: (A) In section 667(a)(1) and (2), IRC, the tax shall be computed under chapter 235, HRS; and (B) Interest income exempt from Hawaii tax under section 235-7, HRS, in the hands of a trust, retains its character when distributed to a beneficiary pursuant to section 662(b) (with respect to character of amounts distributed), IRC. Other interest income that is not exempt from Hawaii tax in the hands of a trust pursuant to section 235-7(b), HRS, is considered a taxable amount for purposes of computing the tax under section 667, IRC, when that income is distributed. (8) Section 668 (with respect to interest charge on accumulation distributions from foreign trusts), IRC, is not operative in Hawaii. (i) to (k) (Reserved) (l) Capital loss carrybacks and carryovers. (I.R.C. section 1212). (1) In general. The federal regulations relating to capital loss carrybacks and carryovers in the Internal Revenue Code shall be operative except that the provisions relating to capital loss carryback shall not be operative and the capital loss carryover allowed by I.R.C. section 1212(a) shall be limited to five years. Individual taxpayers shall be allowed capital loss carryovers until exhausted. (See section 235-2.3(l), HRS.) (m) Subchapter S. (I.R.C. sections 1371 to 1379). (1) In general. The federal regulations relating to the Internal Revenue Code on election of small business corporation shall be operative subject to certain other requirements and modifications for this State. (See section 235-2.3(l), HRS.) (A) A small business corporation shall not have (A) A nonresident as a shareholder; or (B) A resident individual who has taken up residence in the State after age 65 and before 7/1/76 and who is taxed under chapter 235 only on the income from within this State, unless such individual shall have waived the benefit of section 3, Act 60, L. 1976, and shall have included all income from sources within and without this State in the same manner as if the individual had taken up residence in the State after 6/30/76. (2) Election. Effective 1/1/79, an election under I.R.C. Section 1372(a) not to be subject to income taxes shall terminate for the taxable year in which such corporation derives more than 80 per cent of its gross income from sources outside the State. Termination shall remain in effect for all succeeding taxable years. (A) An election under I.R.C. section 1372 shall not be valid unless there is also in effect for such taxable year, an election for federal tax purposes. (B) The tax imposed by I.R.C. section 1378(a) is hereby imposed by this chapter and shall be at a rate of 3.08 per cent on the amount by which the net capital gain exceeds $25,000.00. For purposes of I.R.C. section 1378(c)(3), the amount of tax to be determined shall not exceed 3.08 per cent of the net capital gain attributable to property described under that section. (3) Returns. Every small business corporation as described in I.R.C. section 1371 and this article shall file an income tax return for each taxable year on Form N-35, stating specifically items of its gross income and deductions and such other information as required by the form or in the instruction issued thereto provided under section 235-80, HRS. [Eff 2/16/82; am 9/3/94] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §§235-2.3, 235-2.4) INCOME TAX LAW §18-235-4-03 235- 21 (Unofficial Compilation as of 12/31/2025) §18-235-3 (Reserved) §18-235-3-01 Distribution of credit for partnerships, S corporations, estates, and trusts. Whenever chapter 235, HRS, does not specify how a credit should be distributed or provides that distribution and share of a credit shall be determined by rule, distribution shall be made according to the ratio upon which the partners, S corporation shareholders, or beneficiaries of an estate or trust divide the general profits or losses of the entity; provided that a distribution pursuant to section 704 of the Internal Revenue Code may be made in the case of partnerships.” [Eff 9/18/20] (Auth: HRS §§231-3(9), 235-55.91, 235-110.8, 235-118) (Imp: HRS §§235-2.45, 235- 16.5, 235-17, 235-55.91, 235-110.2, 235-110.7, 235-110.8, 235-110.94) §18-235-4 Amended and renumbered §18-235-4-01, §18-235-4-02, §18-235-4-03, §18-235-4- 04, §18-235-4-05, §18-235-4-06, §18-235-4-07, §18-235-4-08. [9/3/94] §18-235-4-01 Income taxes by the State; residents, nonresidents, corporations, estates and trusts. As used in sections 18-235-4-02 to 18-235-4-08, and sections 18-235-5-01 to 18-235-5-04: “Adjusted gross income” or “adjusted gross income from all sources” means the same as in section 62 (with respect to adjusted gross income defined), IRC. “From whatever source derived” means the same as in section 61(a) (with respect to gross income defined), IRC. “Hawaii adjusted gross income” means Hawaii source income minus the deductions that are allowed as adjustments to gross income under chapter 235, HRS. “Hawaii source income” means income received or derived from property owned, services performed, trade or business carried on, and any and every other source in the State. “IRC” means the Internal Revenue Code of 1986, as operative under chapter 235, HRS. “Jurisdiction” means any state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, any territory or possession of the United States, and any foreign country or political subdivision of a foreign country. “Out-of-state income” means income from whatever source derived, other than Hawaii source income. “Part-year resident” means an individual who becomes a resident, or ceases to be a resident, during the taxable year. “State”, when not referring specifically to Hawaii, means any state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, or any territory or possession of the United States. “Taxable in” another jurisdiction means the same as in section 235-23, HRS. “Territory or possession of the United States” means the same as in section 927(d)(5) (with respect to definition of “possessions”), IRC. “Without regard to source” means the same as “from whatever source derived”. [Eff 2/16/82; am and ren §18-235-4-01 9/3/94] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §§235-4, 235-5, 235-7, 235-55, 235-97) §18-235-4-02 Residents taxable on entire income. (a) A resident, as defined in section 235-1, HRS, is taxable on income from whatever source derived. For a resident, it is immaterial whether the source of the income is Hawaii or another jurisdiction, except that if out-of-state income is taxable in another jurisdiction, a tax credit may be allowed under section 235-55, HRS, and section 18-235-55. (b) A resident shall not exclude or deduct any income allocated or apportioned to another jurisdiction under the Uniform Division of Income for Tax Purposes Act, sections 235-21 to 235-39, HRS, or section 18-235-5-02. (c) For rules relating to change of residence during the taxable year, see section 18-235-4-04. [Eff 2/16/82; am and ren §18-235-4-02 9/3/94] (Auth: HRS §§231-3(9), 235-96, 235-118) (Imp: HRS §§235-4, 235-5, 235- 7, 235-55, 235-97) Historical note: §18-235-4-02 is based substantially upon §18-235-4(a). [Eff 2/16/82; am and ren §18-235- 4-02 9/3/94] §18-235-4-03 Nonresidents taxable on Hawaii income. (a) A nonresident, as defined in section 235-1, HRS, is taxable on Hawaii source income and is not taxable on out-of-state income. A nonresident is not allowed a credit for taxes paid to another state under section 235-55, HRS. (b) A nonresident shall determine Hawaii source income by allocation and apportionment under the Uniform Division of Income for Tax Purposes Act, sections 235-21 to 235-39, HRS, if: (1) The nonresident derives income from business activity both within and without the State, (2) The nonresident’s business activity is taxable in both this State and another jurisdiction, and (3) The income is not derived from the rendering of purely personal services. HRS §235-3 HRS §235-4 HRS §235-4 HRS §235-4 §18-235-4-04 INCOME TAX LAW 235- 22 (Unofficial Compilation as of 12/31/2025) Otherwise, a nonresident shall determine Hawaii source income by allocation and separate accounting pursuant to section 235-5, HRS, and section 18-235-5-02. (c) A nonresident, foreign corporation, or other nonresident taxpayer: (1) Which acts as a business entity in more than one state; (2) Whose only activities within the State, either alone or as part of a unitary group, consist of sales and do not include: (A) Owning or renting real estate or tangible personal property, or (B) Personal services; and (3) Whose annual gross sales in or into this State during the tax year are not in excess of $100,000, may elect to report and pay a tax of 0.5 per cent of such gross sales in lieu of the tax otherwise imposed by chapter 235, HRS. An election under this subsection shall constitute the election described in article III, paragraph 2 of the Multistate Tax Compact, chapter 255, HRS, and provided in section 235-51(e) or 235-71(e), HRS. The election may be made by timely filing the form prescribed by the department for this purpose. The election shall be made not later than the last day prescribed by law (including extensions of time) for filing the net income tax return that otherwise would be filed for the tax year. (d) If a nonresident files a joint return with a spouse who is a resident for the full taxable year, the tax is imposed on aggregate income for the full taxable year without regard to source. A nonresident spouse filing a joint return does not thereby become a resident for purposes of chapter 235, HRS. (e) This section shall apply to individuals described in section 3 of Act 60, SLH 1976, namely those who have taken up residence in the State: (1) after attaining the age of sixty-five years, and (2) before July 1, 1976. For those individuals, subsection (c) shall not apply, and no credit for tax paid to another state under section 235-55, HRS, shall be allowed. Any individual may waive the benefits of section 3 of Act 60, SLH 1976, by filing a written election with the department. This subsection shall not apply to any individual who has made such a waiver. (f) For rules relating to change of residence during the taxable year, see section 18-235-4-04. (g) For rules used to determine the source of income, see section 18-235-4-08. (h) For deductions of a nonresident, and rules regarding income from alimony or separate maintenance payments, see section 18-235-5-03. [Eff 2/16/82; am and ren §18-235-4-03 9/3/94] (Auth: HRS §§231-3(9), 235-96, 235-118) (Imp: HRS §§235-4, 235-5, 235-7, 235-22, 235-51(e), 235-52, 235-71(e), 235-93, 235-97, 255-1) Historical note: §18-235-4-03 is based on §18-235-4(b). [Eff 2/16/82; am and ren §18-235-4-03 9/3/94] §18-235-4-04 Change of residence during taxable year. (a) The following rules are applied if during the taxable year the status of a taxpayer changes from resident to nonresident, or from nonresident to resident. (1) For the period of residence, the tax is imposed on income from whatever source derived, as provided in section 18-235-4-02. (2) For the period of nonresidence, the tax is imposed on Hawaii source income, as provided in section 18-235-4-03. Part-year residents shall not be eligible for the election in section 18- 235-4-03(c). (3) If it cannot be determined whether all or part of a taxpayer’s income was generated during the period of residence, that amount of income shall be multiplied by the ratio that the period of residence bears to the entire taxable year. The product shall be the portion attributable to Hawaii, unless the taxpayer demonstrates to the satisfaction of the department that the result attributes to Hawaii out-of-state income that was received or derived during the period of nonresidence. (4) The credit for tax paid to another state under section 235-55, HRS, shall be allowed only for tax paid on out-of-state income allocable to the period of residence. Example: T, an unmarried cash basis calendar year taxpayer, was a resident of Arizona on January 1, 1993. T moved to Hawaii on April 1, 1993, and continued to work as an insurance agent. T is a Hawaii resident for the remainder of 1993. T received $20,000 as gain from the sale on March 20, 1993, of Arizona real property held for investment. T earned commissions of $25,000 for policies sold after April 1, 1993. T earned initial and renewal commissions of $12,000 for policies sold before that date, $4,000 of which T earned before April 1, 1993. In addition, T had signed a business consulting contract with one Arizona client, for which T was paid an additional $1,200 for services rendered throughout the year. T’s Hawaii income is computed as follows: (1) The $20,000 gain is out-of-state income earned when T was a nonresident. None of it is attributable to Hawaii. HRS §235-4 INCOME TAX LAW §18-235-4-05 235- 23 (Unofficial Compilation as of 12/31/2025) (2) The commissions of $25,000 are from a trade or business carried on in Hawaii, and are Hawaii source income. The commissions were earned when T was a Hawaii resident. All of these commissions are attributable to Hawaii. (3) The $12,000 in commissions earned before April 1993 is from a trade or business carried on in Arizona, and is thus out-of-state income. However, only $4,000 was earned when T was a nonresident. The remaining $8,000 is attributable to Hawaii. (4) It cannot be determined whether the remaining $1,200 in commission income was generated while T was a Hawaii resident. Thus, because T was a resident for nine months in 1993, 9/12 x $1,200, or $900, shall be attributable to Hawaii unless T demonstrates otherwise to the satisfaction of the department. (b) The following rules are applied for joint returns. (1) If a nonresident or a part-year resident files a joint return with a spouse who is a resident for the full taxable year, the tax is imposed on aggregate income for the full taxable year without regard to source and without regard to either spouse’s period of residence. (2) If a joint return is filed by two individuals neither of whom is a resident for the full taxable year, the tax is imposed on aggregate income without regard to source for the period in which either spouse was a resident. (3) By filing a joint return, a nonresident spouse does not become a resident, and a part-year resident spouse does not thereby become a resident for any other part of the year, for purposes of chapter 235, HRS. (c) For deductions of a part-year resident, and rules regarding income from alimony or separate maintenance payments, see section 18-235-5-03. [Eff 2/16/82; am and ren §18-235-4-04 9/3/94] (Auth: HRS §§231- 3(9), 235-5(d), 235-96, 235-118) (Imp: HRS §§235-4, 235-5, 235-7, 235-22, 235-52, 235-55, 235-97, 255-1) Historical note: §18-235-4-04 is based on §18-235-4(f). [Eff 2/16/82; am and ren §18-235-4-04 9/3/94] §18-235-4-05 Corporations; domestic and foreign. (a) Domestic corporations, including professional and nonprofit corporations, are subject to tax on Hawaii source income. Domestic corporations also are subject to tax on out-of-state income that is not taxable in another jurisdiction. (b) Income from business activity within and without Hawaii that is taxable in another jurisdiction shall be apportioned under the Uniform Division of Income for Tax Purposes Act, sections 235-21 to 235-39, HRS. A domestic corporation is subject to tax in Hawaii on income that is allocated or apportioned to any jurisdiction in which that corporation is not taxable. Example 1: Corporation X, a Hawaii corporation, is actively engaged in selling farm equipment in Hawaii and State A. Both Hawaii and State A impose a net income tax but State A exempts corporations engaged in selling farm equipment. Corporation X is taxable in both Hawaii and State A. Corporation X is not subject to tax in Hawaii on income that is allocated or apportioned to State A. Example 2: The facts are the same as in Example 1, except that State A may not impose a net income tax on Corporation X because of Public Law No. 86-272, 15 U.S.C. sections 381-384. Corporation X is taxable in Hawaii and is not taxable in State A. Corporation X is subject to tax in Hawaii on income that is allocated or apportioned to State A. (c) Foreign corporations are subject to tax on Hawaii source income and are not subject to tax on out-of- state income. (d) For rules relating to corporations for which an election under section 1362 (with respect to S corporations), IRC, is in effect, see section 18-235-122. (e) For the election available under the Multistate Tax Compact to a foreign corporation whose only activities within the State consist of sales, see section 18-235-4-03(c). (f) For rules used to determine the source of income, see section 18-235-4-08. [Eff 2/16/82; am and ren §18-235-4-05 9/3/94] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §§235-4, 235-5, 235-7, 235-22, 255-1) Historical note: §18-235-4-05 is based upon §18-235-5(a)(2)-(3). [Eff 2/16/82; am 9/3/94] HRS §235-4 §18-235-4-06 INCOME TAX LAW 235- 24 (Unofficial Compilation as of 12/31/2025) §18-235-4-06 Resident and nonresident estates, trusts, and beneficiaries. (a) As used in this section: “Beneficiary” includes an heir, legatee, devisee, and any person to whom income of a trust is attributed under section 671 (with respect to trust income, deductions, and credits attributable to grantors and others as substantial owners), IRC. “Beneficiary’s share of income” means that portion of the income of an estate or trust: (1) that the beneficiary is required to include in income under subchapter J (with respect to estates, trusts, beneficiaries, and decedents), IRC; or (2) that is attributed to the beneficiary under section 671, IRC. “Resident beneficiary” means a beneficiary who is a “resident person” within the meaning of section 235-68(a), HRS. (b) An estate or trust shall report its gross income from whatever source derived, each beneficiary’s share of income, and each beneficiary’s share of Hawaii source income if: (1) It is a resident estate or trust, as defined in section 235-1, HRS; (2) Any of its beneficiaries is a resident beneficiary; or (3) Any part of its income is attributed to a resident beneficiary under section 671, IRC. (c) An estate or trust not described in subsection (b) shall report all Hawaii source income, and also shall report each beneficiary’s share of Hawaii source income. (d) An estate or trust shall determine Hawaii source income by allocation and apportionment under the Uniform Division of Income for Tax Purposes Act, sections 235-21 to 235-39, HRS, if: (1) The estate or trust derives income from business activity both within and without the State, (2) The estate’s or trust’s business activity is taxable in both this State and another jurisdiction, and (3) The income is not derived from the rendering of purely personal services. Otherwise, an estate or trust shall determine Hawaii source income by allocation and separate accounting pursuant to section 235-5, HRS, and section 18-235-5-02. (e) A resident estate or trust is taxable on income from whatever source derived, whether or not the administration of the estate or trust is principal, ancillary, or carried on in this State. A resident estate or trust shall not exclude or deduct any income allocated or apportioned to another jurisdiction under the Uniform Division of Income for Tax Purposes Act, sections 235-21 to 235-39, HRS. If a resident estate or trust has out-of-state income that is taxable in another jurisdiction, a tax credit may be allowed under section 235-55, HRS, and section 18-235-55. (f) A nonresident estate or trust is taxable on Hawaii source income and is not taxable on out-of-state income. (g) A beneficiary is subject to tax on that beneficiary’s share of income as if the beneficiary had received that income directly, and had directly incurred any deductions allowable under subsection (h), whether or not the estate or trust is a resident, and whether or not the estate or trust is required to file a return. (1) A resident beneficiary is subject to tax upon that beneficiary’s share of income from whatever source derived. (2) A nonresident beneficiary (or a beneficiary taking up residence in the State after attaining the age of sixty-five years but before July 1, 1976) is subject to tax upon that beneficiary’s share of Hawaii source income. If a nonresident beneficiary of a resident trust derives income from intangibles, see section 235-4.5, HRS. (h) In computing an estate’s or trust’s Hawaii adjusted gross income or taxable income, or any beneficiary’s share of Hawaii source income, deductions shall be allowed only to the extent permitted by section 235- 5(c), HRS, and section 18-235-5-03. (i) The recipient of income in respect of a decedent is subject to tax as if the decedent had received that income directly, and had directly incurred any deductions, losses, or credits allowable to the recipient under section 691 (with respect to recipients of income in respect of decedents), IRC. In computing a recipient’s allowable deductions, see section 235-5(c), HRS, and section 18-235-5-03. Thus, if the decedent were a resident at the time of death, the recipient, whether or not a resident, is subject to tax upon the income whether or not it is Hawaii source income. [Eff 2/16/82; am and ren §18-235-4-06 9/3/94] (Auth: HRS §§231-3(9), 235-96, 235-118) (Imp: HRS §§235-4, 235-5, 235- 7, 235-22, 235-94(d)) Historical note: §18-235-4-06 is based on §§18-235-2.3(h)(8)(E), (h)(9), (h)(10) [Eff 2/16/82; am 9/3/94], and 18-235-4(c), (d), and (g)(4). [Eff 2/16/82; am and ren §18-235-4-06 9/3/94] §18-235-4-07 Resident and nonresident partners of a partnership. (a) A resident partner is subject to tax on the partner’s distributive share of the partnership income from whatever source derived. (b) A nonresident partner is subject to tax on the partner’s distributive share of Hawaii source income. HRS §235-4 HRS §235-4 INCOME TAX LAW §18-235-4-08 235- 25 (Unofficial Compilation as of 12/31/2025) (c) Partners of a partnership shall be subject to tax on their distributive shares of partnership income whether or not the partnership is required to file a return. (d) A partnership shall determine Hawaii source income by allocation and apportionment under the Uniform Division of Income for Tax Purposes Act, sections 235-21 to 235-39, HRS, if: (1) The partnership derives income from business activity both within and without the State, (2) The partnership’s business activity is taxable in both this State and another jurisdiction, and (3) The income is not derived from the rendering of purely personal services. Otherwise, a partnership shall determine Hawaii source income by allocation and separate accounting pursuant to section 235-5, HRS, and section 18-235-5-02. (e) A partnership return made pursuant to section 235-95, HRS, shall report the gross income, gains, losses, deductions, and credits from whatever source derived, and each partner’s distributive share of those items. The partnership also shall report each partner’s distributive share of income, gains, losses, deductions, and credits from sources within the State. (f) For corporations that are partners of a partnership, see section 18-235-4-05. [Eff 2/16/82; am and ren §18-235-4-07 9/3/94] (Auth: HRS §§231-3(9), 235-96, 235-118) (Imp: HRS §§235-4, 235-5, 235-7, 235-95) Historical note: §18-235-4-07 is based substantially on §18-235-4(e). [Eff 2/16/82; am and ren §18-235-4- 07 9/3/94] §18-235-4-08 Source of income. (a) Income derived from real or tangible personal property is sourced at the place where the property is owned, namely the place where the property has its situs. If tangible personal property is owned and used in different locations, income from the property shall be allocated as provided in section 235-25, HRS. (b) Income from intangible property, such as interest and dividends, is sourced at the place of the owner’s domicile unless the property has acquired a business situs at another place, in which event the income is sourced at that place. Intangible property has a business situs in this State if it is employed as capital in this State or the possession and control of the property has been localized in this State. Example 1: A corporation owns stocks, bonds, and other intangible personal property. It pledges the property in Hawaii as security for the payment of indebtedness, taxes, and other expenses incurred in connection with a business in this State. The pledged property has a business situs in Hawaii. Example 2: A corporation maintains a branch office here and opens a bank account on which the agent in charge of the branch office may draw for the payment of expenses in connection with the activities in this State. The bank account has a business situs in Hawaii. Example 3: The corpus of a trust contains United States Treasury bills, bank certificates of deposit, and shares of preferred and common stock. The trustee of the trust, a Hawaii corporation, exclusively holds, controls, and administers the corpus of the trust. The trustee is permitted broad discretion to invest trust income and accumulations and is responsible for the collection and disbursement of any income generated by the trust assets. The property forming the corpus of the trust has a business situs in Hawaii. Thus, the trust’s income is Hawaii source income; however, the exclusion in section 235-4.5, HRS, may apply in some cases. (c) Income from an interest in real property, such as a leasehold, has its situs where the real property is located. The situs of the purchaser’s interest under a contract for the sale of real property is where the real property is located. (d) Income from a trade or business is sourced at the place where the trade or business is carried on. (e) Income from the performance of personal services has its source at the place where the services are performed. (f) A gain or loss on the sale or other disposition of property has its source at the place where the property was owned, that is, where it had its situs, at the time of the sale or other disposition. This rule applies whenever gain or loss is considered as resulting from the sale or other disposition of the underlying property, irrespective of where the contract for the sale or other disposition of the property was made. Thus, if property is disposed of on the installment method, the portion of any installment payment that represents gross profit is income that has its source at the place where the underlying property had its situs at the time of disposition. Example: Y is the vendor on an agreement of sale for real property on Kauai. In 1994, Y sells Y’s interest to S and realizes a gain of $5,000 under section 453B (with respect to gain or loss HRS §235-4 §18-235-5 INCOME TAX LAW 235- 26 (Unofficial Compilation as of 12/31/2025) on disposition of installment obligations), IRC. Under section 453B, IRC, the gain is considered to be from the sale or exchange of the property in respect of which the installment obligation was received. Thus, because the underlying property is located in Hawaii, the $5,000 is Hawaii source income. [Eff 2/16/82; am and ren 9/3/94] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §§235-4, 235-5, 235-7) Historical note: §18-235-4-08 is based substantially upon §18-235-4(g)(1)-(7). [Eff 2/16/82; am and ren §18-235-4-08 9/3/94] §18-235-5 Amended and renumbered §18-235-5-01, §18-235-5-02, §18-235-5-03, §18-235-5- 04. [9/3/94] §18-235-5-01 Allocation of income of persons not taxable upon their entire income. (a) The definitions contained in section 18-235-4-01 apply to sections 18-235-5-01 to 18-235-5-04. (b) The rules contained in sections 18-235-5-01 to 18-235-5-04 apply to taxpayers having only nonbusiness income, individual taxpayers having income from the rendering of purely personal services, and public utilities taxable under chapter 239, HRS, whether determining Hawaii source income or out-of-state income. (c) In computing the unrelated business taxable income of a tax exempt organization under sections 512 to 514 (with respect to unrelated business taxable income, unrelated trade or business, and unrelated debt-financed income), IRC, that is subject to tax in Hawaii, sections 235-21 to 235-39, HRS, shall apply. (d) Taxpayers described in subsection (b) shall use these rules for determining estimated tax, determining the amount of credit permitted under section 235-55, HRS, and other purposes that require allocation or apportionment of income between jurisdictions. Other taxpayers shall use sections 235-21 to 235-39, HRS, for those purposes. (e) Section 235-5(c), HRS, and section 18-235-5-03 apply to all taxpayers. [Eff 2/16/82; am and ren §18-235-5-01 9/3/94] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §§235-4, 235-5, 235-7) Historical note: §18-235-5-01 is based upon §18-235-4(g)(8). [Eff 2/16/82; am and ren 9/3/94] §18-235-5-02 Allocation and separate accounting. (a) Taxpayers described in section 18-235-5- 01(b) who are required to determine Hawaii source income shall determine Hawaii source income by allocation and separate accounting so far as practicable as required by section 235-5(b), HRS. (1) If the nature of the taxpayer’s activity renders direct allocation impracticable, or the taxpayer’s books of account and records do not clearly reflect income properly taxable by Hawaii, income shall be allocated or apportioned under sections 235-21 to 235-39, HRS. (2) If the taxpayer’s activity within the State is an integral part of a unitary business carried on within and without the State, income shall be allocated or apportioned under sections 235- 21 to 235-39, HRS. For purposes of this paragraph, “integral part of a unitary business” means the activity is central to the activity of the taxpayer such that allocation and separate accounting is not practicable. (b) When the separate accounting method is used, separate records shall be maintained for sales, cost of sales, and expenses which are attributable to activity within Hawaii. Overhead expenses not directly allocable to activity within or without Hawaii shall be allocated according to the facts and circumstances, and in conformity with generally accepted accounting principles. (c) A change in the taxpayer’s allocation method or apportionment formula is a change in the taxpayer’s method of accounting within the meaning of sections 446 (with respect to methods of accounting) and 481 (with respect to adjustments required by changes in method of accounting), IRC. [Eff 2/16/82; am and ren §18-235-5-02 9/3/94; am 4/2/16] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §235-5) Historical note: §18-235-5-02 is based upon §18-235-5(a)(1) and (b)(1), (3). [Eff 2/16/82; am and ren §18- 235-5-02 9/3/94] §18-235-5-03 Deductions connected with gross income from Hawaii sources. (a) This section applies to all taxpayers, pursuant to section 235-5(c), HRS, and section 265 (with respect to expenses and interest connected with tax-exempt income), IRC. (b) In computing the taxable income of a taxpayer subject to tax on Hawaii source income only: (1) Deductions connected with Hawaii source income shall be allowed. (2) Deductions connected with out-of-state income shall not be allowed. (3) Pursuant to section 235-7(e), HRS, no deduction is allowed for interest paid or accrued on debt incurred or continued: HRS §235-5 HRS §235-5 HRS §235-5 INCOME TAX LAW §18-235-5-03 235- 27 (Unofficial Compilation as of 12/31/2025) (A) To purchase or carry bonds if interest paid by the bond issuer is out-of-state income or is exempt from taxation under section 235-7(a), HRS; (B) To purchase or carry property owned outside of the State; or (C) To carry on a trade or business outside of the State. (4) Deductions from Hawaii adjusted gross income that are not connected with particular property or income, such as medical expenses, shall be allowed only to the extent of the ratio of Hawaii adjusted gross income to adjusted gross income from all sources. (5) Adjustments to income that are not connected with particular property or income shall be allowed only in the proportion determined under the following formula. (A) Determine the aggregate amount of the adjustments not connected with particular property or income. (B) Determine Hawaii source income and subtract all adjustments to income other than those included in (A). (C) Add the amount in (A) to adjusted gross income from all sources. (D) The ratio of (B) to (C) is the proportion of the adjustments that are allowable. (6) Deductions are connected with a particular kind of income if the deductions would be allocable to that income under the principles of section 265 (with respect to expenses and interest connected with tax-exempt income), IRC, and section 1.265-1(c) (with respect to allocation of expenses to a class or classes of exempt income), Treasury Regulations. Example: T, a single person aged 60, is a nonresident owning rental property in the State from which T derives $3,500 of gross income during the taxable year and incurs $500 of associated expenses, such as general excise and real property taxes. T also has paid $1,500 in interest on a mortgage on T’s personal residence in Iowa. T’s adjusted gross income from all sources is $12,000. During the taxable year, T’s expenses of medical care, qualifying as such under section 213 (with respect to medical, dental, and similar expenses), IRC, are $1,000. (1) Because the $500 in expenses is attributable to the rental property in Hawaii, the entire amount is allowed as a deduction. T therefore has $3,500 - $500, or $3,000, in Hawaii adjusted gross income. (2) Because the $1,500 in interest is connected with real property outside Hawaii, no part of that amount is allowed as a deduction against Hawaii income. (3) The $1,000 of medical expenses, wherever incurred, is not connected with any particular property or income. Thus, it shall be prorated by applying the ratio of Hawaii adjusted gross income to adjusted gross income from all sources. In this case the result is ($3,000/$12,000 x $1,000), or $250. If T does not take the standard deduction, T may deduct medical expenses in excess of 7.5 per cent of T’s Hawaii adjusted gross income. Because 7.5 per cent of $3,000 is $225, T’s medical expense deduction for Hawaii purposes is limited to $250 - $225, or $25. (c) If a taxpayer is taxable only upon Hawaii source income and the taxpayer’s deductions connected with out-of-state income exceed the amount of out-of-state income, the excess shall not be deductible against Hawaii source income and shall not be carried over or carried back to offset Hawaii source income in any other taxable year. (d) If a taxpayer is a part-year resident, the following procedure shall be followed. (1) Income shall be allocated between the period of residence and the period of nonresidence, under section 18-235-4-04. (2) Deductions shall be allocated between those connected with income allocable to the period of residence, and those connected with income allocable to the period of nonresidence. Deductions shall be allocated in the same ratio as the connected income, unless the taxpayer demonstrates to the satisfaction of the department of taxation that the result materially distorts Hawaii income. (3) Deductions connected with income allocable to the period of residence shall be allowed. (4) Other deductions shall be allowed or disallowed under the principles in subsections (b) and (c), but in applying those subsections to a part-year resident, Hawaii adjusted gross income shall include all income and adjustments allocable to the period of residence. (5) If a joint return is filed by two taxpayers neither of whom was a resident for the full taxable year, the period of residence shall be the period in which either spouse was a resident, and the period of nonresidence shall be the period in which neither spouse was a resident. §18-235-5-03 INCOME TAX LAW 235- 28 (Unofficial Compilation as of 12/31/2025) Example: T, an unmarried cash basis calendar year taxpayer, was a resident of Arizona on January 1, 1993. T moved to Hawaii on April 1, 1993, and continued to work as an insurance agent. T is a Hawaii resident for the remainder of 1993. T received $20,000 as gain from the sale on March 20, 1993, of Arizona real property held for investment. T earned commissions of $25,000 for policies sold after April 1, 1993. T earned initial and renewal commissions of $12,000 for policies sold before that date, $4,000 of which T earned before April 1, 1993. In addition, T had signed a business consulting contract with one Arizona client, for which T was paid an additional $1,200 for services rendered throughout the year. (For analysis of T’s income, see section 18-235-4-04(a), Example.) (1) On January 15, 1993, T paid $100 to renew T’s Arizona insurance agent’s license. None of the $100 is deductible against Hawaii income because the license only relates to out-of-state income received when T was a nonresident. (2) T incurs $3,600 in business expenses connected with T’s business as an insurance agent, but the expenses cannot be connected to specific sales of policies. As explained in section 18-235-4-04(a), Example, $33,900 of the $38,200 of commission income is allocable to T’s period of residence. Thus, ($33,900 / $38,200) x $3,600, or $3,195, of the expenses are allocable to the period of residence and are deductible as trade and business deductions. Because the remaining commission income is out-of-state income allocable to a period of nonresidence, the remaining $405 of expenses is not deductible unless T demonstrates to the satisfaction of the department that the result materially distorts income. (3) T pays $2,000 to an accountant to prepare T’s tax return. T’s adjusted gross income from all sources is $20,000 - $1,500 + $38,200 - $3,600, or $53,100, and T’s Hawaii adjusted gross income, which includes T’s out-of-state income earned while T was a Hawaii resident, is $33,900 - $3,195, or $30,705. Because T’s tax return preparation expenses are not connected with particular property or income, the amount allowable in Hawaii is ($30,705 / $53,100) x $2,000, or $1,156. The tax return preparation expense is a miscellaneous itemized deduction subject to the 2 per cent floor of section 67, IRC. If T does not take the standard deduction and has no other miscellaneous itemized deductions, T may deduct the amount in excess of 2 per cent of Hawaii adjusted gross income, so the deductible amount is $1,156 - (0.02 x $30,705) = $542. (e) This subsection applies to payments of alimony or separate maintenance. (1) As used in this subsection:     “Alimony” means the same as “alimony or separate maintenance payment” in sections 71(b) (with respect to alimony and separate maintenance payments) and 215 (with respect to deduction for alimony and similar payments), IRC.     “Contributing spouse” means the spouse, or former spouse, who pays alimony.     “Recipient spouse” means the spouse, or former spouse, who receives alimony. (2) Alimony is included in the gross income of the recipient spouse where: (A) The recipient spouse is a resident; (B) The recipient spouse became a resident after attaining the age of sixty-five and before July 1, 1976, and either the contributing spouse is a resident or the payments are attributable to property owned in the State that is transferred (in trust or otherwise) in discharge of a legal obligation to make alimony payments; or (C) The recipient spouse is a nonresident, the contributing spouse is a resident, and the payments are attributable to property owned in the State that is transferred (in trust or otherwise) in discharge of a legal obligation to make alimony payments. (3) Alimony is deductible from the income of the contributing spouse as follows: (A) If the contributing spouse is a resident for the full taxable year, the payment of alimony is deductible in full; or (B) If the contributing spouse is not a resident for the full taxable year, the payment of alimony shall be prorated under subsection (b)(4) to yield the deductible amount. (f) This subsection applies to deductions by individual taxpayers for contributions to pension, profit sharing, stock bonus, and similar plans. (1) An individual’s deduction for contributions to a retirement plan, such as that under sections 219 (with respect to retirement savings), 404(a)(8) (with respect to deduction for contributions of self-employed individuals), or 408 (with respect to individual retirement accounts), IRC, shall be allowed only to the extent that the deduction is attributed to compensation earned: (A) In this State, or INCOME TAX LAW §18-235-5-05 235- 29 (Unofficial Compilation as of 12/31/2025) (B) While the individual was a resident. (2) As used in this subsection, “compensation” means the same as in section 219(f)(1), IRC. (3) An individual’s deduction for contribution to an individual retirement account shall be presumed to be made pro rata from all compensation earned during the taxable year in which the contribution is deductible. (4) A rollover contribution, as described in section 219(d)(2), IRC, shall not be reduced or disallowed under this subsection. (5) For rules to determine where compensation is earned, see section 235-34, HRS. Example: In 1994, T earned $30,000 in California while residing there and working for BMI Co. On May 13, 1994, T moved to Hawaii to work for Exrox Co. and earned $20,000 during 1994. After the move, T rolled over the entire BMI Co. retirement plan balance to an individual retirement account (IRA). T established another IRA in Hawaii and contributed $2,000 on April 1, 1995, that is deductible for federal purposes in 1994. T is a part-year resident. Under paragraph (4), T’s establishment of the rollover IRA is not subject to tax. Under paragraph (3), the $2,000 IRA contribution is prorated between all compensation sources. Hawaii compensation is $20,000 and total compensation is $50,000. Thus, $2,000 x ($20,000 / $50,000), or $800, is considered to be from Hawaii compensation and is thus deductible in Hawaii. [Eff 2/16/82; am and ren §18-235-5-03 9/3/94] (Auth: HRS §§231-3(9), 235-5(d), 235-118) (Imp: HRS §§235-4, 235-5, 235-7) Historical note: §18-235-5-03 is based upon §18-235-5(c). [Eff 2/16/82; am and ren §18-235-5-03 9/3/94] §18-235-5-04 Allocation of income and deductions among taxpayers. (a) If two or more organizations, trades, or businesses, whether or not incorporated or organized in Hawaii, are owned or controlled directly or indirectly by the same interests, the director may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among the organizations, trades, or businesses, if the director determines that the distribution, apportionment, or allocation is necessary in order to clearly reflect the income attributable to any taxpayer’s activity in this State. (b) This section shall not be construed to permit the filing of consolidated returns by two or more affiliated corporations except as provided by section 235-92, HRS. (c) The director shall not allocate or apportion income to Hawaii in excess of what is considered just and reasonable under the circumstances. [Eff 2/16/82; am and ren §18-235-5-04 9/3/94] (Auth: HRS §§231-3(9), 235-5(d), 235-118) (Imp: HRS §235-5) Historical note: §18-235-5-04 is based substantially upon §18-235-5(b)(4). [Eff 2/16/82; am and ren §18- 235-5-04 9/3/94] §18-235-5-05 Alternative apportionment. (a) As authorized by section 235-5(e), HRS, if the director of taxation determines that the method set forth in section 235-5, HRS, and administrative rules thereunder does not fairly determine income derived from or attributable to Hawaii, or does not clearly and accurately reflect the actual amount of income received from all property and sources within the State, the director may permit or require: (1) Separate accounting; (2) The exclusion of any one or more of the factors; (3) The inclusion of one or more additional factors which will fairly represent the taxpayer’s business activity in this State; or (4) The employment of any other method to effectuate an equitable allocation and apportionment of the taxpayer’s income. (b) A taxpayer may petition the director to use an alternative apportionment method pursuant to section 235-5(e), HRS, by written request. (1) The petition shall include data clearly showing that the application of factors provided in the law, including these rules, does not result in a reasonable attribution of net income to Hawaii due to the peculiar nature of the taxpayer’s business and that the taxpayer’s proposed method more clearly reflects income attributable to Hawaii. (2) The petition shall disclose the extent to which the proposed method is being used in other states to which the taxpayer reports. (c) The following shall be sufficient to constitute the director’s imposition of alternative apportionment under this section: HRS §235-5 HRS §235-5 §18-235-5.5 INCOME TAX LAW 235- 30 (Unofficial Compilation as of 12/31/2025) (1) Issuance of an assessment based on an alternative method accompanied by notification that an alternative method was used; (2) For a claim for refund on an original return, denial of a taxpayer’s claim for refund accompanied by notification that an alternative method was used; (3) For a claim for refund made via an amended original return, denial of a taxpayer’s claim for refund without more, provided that the alternative used by the director consists wholly of the method used by the taxpayer in filing its original return. (4) In all other cases, any notification that an alternative method was used.” [Eff 4/2/16] (Auth: HRS §§231-3(9), 235-118) (Imp: HRS §235-5)