HAR §15-6-10. Business appl ication procedure

(a) A business interested in participat ing in the enterprise zones program should obtain an application form from the department . The form should be completed by the busi ness , reviewed by an independent account ant who shall be responsibl e for veri fying the accuracy of the information in t he application, and submit ted to the department . (b) The b usiness shall submi t separate applications for each zone in wh ich it conducts trade or business . (c) A business may participate in the program for a seven-year cycle . A b usiness e ngaged in manufacturing t angible personal property or producing or processing of agricultural products may participate in the program for an additional three-year cycle . Duri ng the initial year of the seven- year cycle, the department shall determine i f the appl y i ng business i s eligible to participate in the enter prise zones program. The busi ness shall be advised of the department ' s decision . The seven- year cycle will commence on the first of the month following the date that the department determines that t he business is eligible to participate in the program. The business may claim the exemption from the general excise tax 6-12 314 3 § 15-6-10 from the first of the month following the date the department determines that the business is e l igible to participate in the program . I f the b usiness is not certified a t the end of the year, however, the busi ness shall pay all taxes , penalties , and interest normally levied by law to the depart ment of t axation . (d) A qualified business shall not be entitled to a credi t against taxes due t he State, until certified by the department. The department of taxation shall reject any claim for exemption in a return filed without the certification . At the end of each taxable year of the business ' qualificati on period, including the initial year, the department shall determine if the business should be certified to receive the state income tax credits and general excise tax exemption available under this program . For t he department to make this determination, the business must submit to the department a form designated by t he department . Following its review of the forms , the department shall return the certified form to the business and notify the department of taxation if the business is certified. (e) A business that has been certified shall : ( 1 ) File the applicable state tax returns ; ( 2) Attach copies of the appropriate department form and department of taxation enterprise zone tax credit form to the tax return; and (3) Forward a copy of the certified department form to the governing body of the county in which the qual ified business is located . (f) The b usiness tax credits may be claimed at the end of each tax year of the business ' qualification period, includi ng the initial year, if the appropriate tax returns are filed and a credit is claimed against any taxes due the State on the tax returns . These returns need not be prepared by an accountant . The department of taxation enterprise zone tax credit form shall be attached to the tax returns filed with the department of taxation . All taxes, 6-1 3 ~, J, 7i §15-6-10 penalties, and int erest normally levied by law shall be paid to the department of t axation for the period that the business is not certified to receive enterprise zone tax benefits . Additionally, the department of taxation, during the statutory limitations period, may audit a business to determine whether : (1) The business is engaged in an eligibl e business activi ty, as defined in chapter 209E, HRS; (2) The business has properly allocated and apportioned i ncome f rom trade or business i n a zone, which is eligible for the income tax credits and t he gener al excise tax exemption, from other income that i s not eligi b l e for the c redits a nd exemption , i ncluding income from business activity within the zone which does not fall within the definition of a n eligible business act ivity or income from b usiness activi ty conducted out s i de the zone ; and (3) The business has properly allocated the business tax c r edits based upon the number of months it is qualified during the taxable year . (g) The exemption from the general excise tax may be claimed at the time of the filing o f the returns during the i nitial year, as p r ovided in subsection (c), and in s ubsequent years of the business ' qualification period a t the time of the f iling of the returns if the tax returns are filed as required by law . A business shall submit standard periodic tax returns (monthly, quart erly, or semiannually ) as required under chapter 237, HRS, and clai m an exemption from the general excise tax for trade or business in the zone . The periodic returns and the annual return need not be prepared by an accountant . These returns shall be fi led , claiming the 6- 14 3143 §15- 6- 11 exemption, even when no tax is due . The appropriate department form shall also be attached to the annual tax return. All taxes , penalties , and interest normally levi ed by law shall be paid to t h e department of taxati on for the peri od that the business is not certified to recei ve enterprise zone tax benefits . Additionally, the departme nt of taxation, during the statut o r y limi tations period, may a ud i t a business to determine whet her (1 ) the business is engaged in an eligible business activi ty, as defined in chapter 209E, HRS; (2) the business has properly allocated and apporti oned income from trade or business i n a zone which is eli g i ble for the business tax credi ts and t h e general excise tax exemption, from other income t hat i s not e ligible for the c r edits and exempt ion, includ ing income from business acti v i ty within the zone t hat does not fall within the defini tion of eligible b us i ness act i v i ty o r income from business activity conducted outside the zone ; and (3) the b usiness has properly allocated the general excise exemption based upon the number of months it is qualified during the taxabl e year . [Eff 11/3/90; am and comp FEB 28 2015 ] (Auth : HRS §209E- 8) (Imp : HRS §209E-9) § 15- 6- 11 State income tax credits and general excise tax exempti on available t o a bu s i ness t hat has been certified . (a) A business that has been certified is entitled, subject to the apportionment provisions discussed i n these ru l es , to tax credits against any taxes due under chapter 235 , HRS to the State according to the following formula : First year of the seven-year cycl e 80 per cent of tax due Second year of the seven-year cycle 70 per cent of tax due Third year of the seven-year cycle 60 per cent of tax d ue 6-15 ~ 1 la.1 §15-6-11 Fourth year of the seven- year cycle 50 per cent of tax due Fifth year of t he seven-year cycle 40 per cent of tax due Sixth year of the seven- year cycle 30 per cent of tax due Seventh year of the seven-year cycle 20 per cent of tax due Eighth, ninth, and tenth years (extended three­ year cycle) 20 per cent of tax due for qualified b usinesses engaged in the manufacturing of tangible personal property or the producing or processing of agricultural products. The business shall be eligible for a credit against any taxes due the State under chapter 235 , HRS when the tax return required is filed with the department of taxation, together with the certification by the department . No unusable tax credit shall carry over or carry back or be refunded . (b) A business that has been certified is entitled, subject to the apportionment provisions discussed in these rules, to tax credits against any taxes due to the State under chapter 235, HRS in an amount equal to a percentage of unemployment insurance premiums paid on the payroll of a ll the business ' employees employed within enterprise zones located within the same county, according to the following formula: First year of the seven-year cycle 80 per cent of premiums paid Second year of t he seven-year cycle 70 per cent of premiums paid Third year of the seven-year cycle 60 per cent of premiums paid Fourth year of the seven-year cycle 50 per cent of premiums paid 6-16 ~143 §15- 6-11 Fifth year of the seven- year cycle 40 per cent of premiums paid Si xth year of t he seven- year cycle 30 per cent of premiums paid Seventh year of the seven-year cycle 20 per cent of p r emiums pai d Eighth, ninth, and tenth years (extended three-year cycle) 20 per cent of premiums paid for qualified businesses engaged in the manufacturing of tangible personal property or the producing or processi ng of agricultural products . Tax credi ts provided for in this s ubsection apply only to the amount of unemployment insurance premiums paid. Those premiums shall be paid by the business and the business shall be e l igible for a credit against any taxes due to t he State under c hapter 235 , HRS when the a nnual tax retur n required is f iled with the department of taxation, together with the certification by the department . No unusable tax credit may be carried over or carried back to another tax period . (c) The tax credits allowed under subsections (a) and (b) may be combined by the business . The department of taxation, however, shall not refund any unusable credi t . The applicati on of this provision is illustrat ed in the following example . Exampl e 1 : ABC Company ' s application to partici pate in t he ent erp rise zones program is approved by the department shortly after ABC commences a trade or business in an eligible business act i v i ty in a zone . All of ABC ' s income is derived from trade or business in an eligible business acti vity within the zone . During the ini tial year of the seven- year cycle, ABC pays $500 in unemployment insurance premiums for all employees. ABC ' s seven-year cycle begins on January 1. After the 6-17 §15- 6-11 initial year of the seven-year cycle, it is determined that ABC owes $1,000 in net income taxes to the Stat e under chapter 235, HRS . When ABC files its tax returns at the end of the initial year, it is eligible for a tax credit equaling 80 per cent of the income taxes due, or $800 . ABC is a lso eligible for a credit of [-&e) 80 per cent of unemployment insurance premiums paid, or $400 . Thus, ABC ' s total credits under the program against income taxes are $1,200. As ABC' s income tax liability is $1,000 , ABC tax credit is limited to $1 , 000 at the end of the initial year if ABC is certified by the department even though the calculated maximum credit is $1,200. The $200 of unusable credit, however , shall not be refunded to ABC nor shall it be carried over or carried back to another tax peri od . (d) A business may claim the exemption from the general excise tax on the gross receipts from all transactions eligible under this chapter from the first of the month following the date the department determines that the business is eligible to participate in the program. The business, however, shall fi l e the tax returns required under chapter 237, HRS . The business shall submit standard periodic tax returns as required under chapter 237, HRS, report the gross income from the business , and [-) claim an exemption from the general excise tax for trade or business in the zone. These returns shall be filed even if no tax is due. (e) Businesses engaged in the manufacturing of tangible personal property or the producing or processing of agricultural products are eligible to receive enterprise zone benefits for an extended three-year cycle in addition to their seven- year cycle . [Eff 11/3/90; am and comp FE8 282015 ) (Auth : HRS §209E- 8) (Imp : HRS §§209E-10 , 209E-11) 6-18 314 3 §15- 6- 12 §15- 6- 12 Calculati on of eligibility for tax credits and exemption ; apportionment . (a) This section sets forth the cal culations that a business may have to complete to determine its eligibility for b usiness tax credits and the general excise exemption and the apportionment of the credits and the exemption . (b) During each taxable year, at least 50 per cent of the business ' enterprise zone establishments ' gross receipts must be attributable to the active conduct of a trade or business in an eligible business activity within enterprise zones located within the same county . (c) A business which has income taxable both within and without the State shall apportion and allocate the business ' net income under sections 235­ 21 to 235-38 , HRS, prior to calculating the enterprise zone tax credits . (d) The general excise tax exemption and the enterprise zone tax credi ts shall apply only to the extent t hat a qualified business conducts trade or business in an eligible business activity within enterprise zones located within the same county . (1) The b usiness may claim an exemption from the general excise tax at the time of the filing of the periodic returns required under chapter 237 , HRS , only for trade or business within enterprise zones located within the same county . (2) A business may claim an enterprise zone credit against a ny taxes due t he State . Subject to the allocation and apportionment , if any, under subsection (c), a business with income from business activity which is taxable both within and without an enterprise zone, shall allocate and 6-1 9 §15-6- 12 (3) apportion the income, pursuant to this section, and apply for an enterprise zone tax credit at the end of each t axable year only for the income derived from the qualified business activities of the trade or b usiness within e nter prise zones located within the same county . The business shall multiply the income by a fraction . The numerator of the fraction is the total gross receipts of the qualified business activity conducted by the qualifi ed business in an eligible business activity within enterprise zones located within the same county during the taxable year . The denominator is the total gross receipts of the qualified business within the State during the taxable year, including sales within and without the enterprise zone. (A) For purposes of allocation and apportionment of income under this section, a business ' income is earned outside of an enterprise zone if t he: (i) Income is from business activity within the zone whi ch does not fall within the definition of eligible business activity; or (ii) Income is from business activi ty conduct ed outside the zone . This term includes work that a business located within a zone subcontracts to a business located outside the zone and the work is delivered outside the zone. A business may claim an enterprise zone credit against any taxes due the State under chapter 235, HRS, in an amount equal to a percentage of unemployment insurance premiums paid on the payroll of a ll the 6- 20 3143 § 15-6-12 business' empl oyees employed within ent e r p r ise zones located within t he same county . Where the b usiness has empl oyees both within a nd wi thout the enterprise zone, the busines s s ha ll allocate and apporti on t he unemployment i nsur a nce premiums by multi p l ying the unemp loyment insur ance p r emiums pai d by a fract ion. The numer a t o r of the fraction is t he payr o l l for employees employed wi t hin enterprise zones located within the same county during t he taxable year, and the denominator is t he payrol l for all employees wi thin t he State . (A) An employee i s empl oyed within the zone i f : (i) The individual ' s ser v i ce is performed entirely within the zone ; or (ii) The individua l ' s service is performed both within and without the zone , but the ser vice performed without the zone i s incidental to the i ndivi dual ' s ser v i ce within the zone . (e) The credits , which are r educed i n every year of the seven-year cycle , are apportioned over a twelve- month period . Accor dingly, the credits may have to be a pportioned over two taxabl e years if the department finds that a business is eligibl e to participate under the program d ur i ng a taxabl e year, r a ther than at the s t art of a taxable year . (f) Each partner or S cor poration shareholder of a b usiness t hat has been certified shall separat ely determine for t he partner ' s or shareh o l der ' s taxable year wi t hi n whi c h the business ' taxable year ends , the partner' s o r shareholder ' s share of t he credi t . The partner ' s o r shar ehol der ' s share of t he enti ty ' s net 6-21 §15-6-12 income or loss and unemployment insurance credit shall be determined in accordance with the ratio in which the partners and shareholders divide the profits and losses of the partnership or the S corporation, respectively. (g) The application of this section is illustrated in the following examples: Example 1: ABC Corporation is located in an area designated as an enterprise zone. ABC submits an application to the department . The department determines that ABC is eligible to participate in the program commencing on December 27. Under section 15- 6-10, ABC's seven-year cycle will commence on January 1 . ABC c l aims the general excise tax exemption from January 1 for income from trade or business in the zone . ABC, however, pays the general excise tax for income from business activity without the zone. ABC's total income at the end of the taxable year is $100,000. ABC pays $500 in unemployment insurance premiums during the taxable year. ABC ' s net profit before taxes is $10,000. ABC determines that seventy per cent of its income was attributable to the conduct of a trade or business in an eligibl e business activity in the zone. During the taxable year, ABC properly claimed the general excise exemption for $70,000 of its income . ABC is also eligible for a tax credit against the $440 in taxes ABC owes the State, calculated as follows: (1) 70 per cent of ABC ' s income is derived from sales within the zone ($70,000 divided by $100,000); and (2) 70 per cent multiplied by 80 per cent (the amount of the credit in the first year) multiplied by $440 (ABC's tax liability for the taxable year before the application of the enterprise zone credit) is $246.40 . ABC is also eligible for a 6- 22 3143 §15- 6- 12 credit of $400 , which is 80 per cent of the $500 unemployment insurance premiums paid. Thus , ABC ' s enterprise zone credits against taxes d ue t he State a re $646.40. As ABC ' s tax liability is $440, ABC ma y claim a tax credit of $440. The $206 . 40 of unusable credit, however, shall not be refunded to ABC nor shall it be carried over or carried back to a nothe r tax period. Example 2 : Assume the same facts as in Example 1, except that ABC is a sol e proprietorship owned by individual X who files a joint return with Y; Y has a salary of $20,000; X and Y jointly receive dividends and interest o f $2,000 ; a nd X and Y claim personal exemptions of $2,080 and i t emized deductions of $9 , 920 . X and Y' s adjusted gross income is $32 , 000 , which is calculat ed by a dding the $10,000 profit of ABC, Y's salary of $20, 000, and $2 , 000 in dividends and interest. After subtracting the i temized deductions and personal exemptions, their taxable income is $20,000 . By applying the apport i onment factor of 70 per cent to the $10,000 of income earned by X through ABC, $7 , 000 of ABC 's net p r ofi t is apportioned to trade or business in a n eligible business activity in t he zone . X a nd Y are subject to a tax of $2 , 000 , which is calculated by multiplying X and Y' s taxable income of $20,000 by a tax rate of 10 per cent , before the application of the enterprise zone credit . The tax of $2,000 i s multiplied by 21 . 875 per cent ($7 ,000 divided by $32,000). This amount i s $437 . 50 , which is then multiplied b y 80 per cent to arrive at $350, the ent erprise zone income tax credit which X and Y may claim on the ir joint return . X and Y may also claim a credit of $400 , which is 80 per cent of the $500 i n unempl oyment insur ance premiums paid . 6-23 ,143 §15-6-12 Thus, X and Y' s credits from the program t otal $750 against a tax liability of $2,000 . If no other credits are taken by X and Y, they will owe a balance of $1, 250 t o the State . Example 3 : ABC Corporation, which is engaged in b us i ness within the State but located outside an area designated as an enterprise zone, opens XYZ, an establishment , in an area designated as an enterprise zone . XYZ is a subsidiary of ABC. The department determines that XYZ is eligible to participate in the program commencing on December 27 . Under section 15-6- 2 , XYZ ' s seven-year cycle commences on January 1 . XYZ may claim the general excise tax exemption from January 1 for receipts that XYZ receives for trade or business in an eligible business activity in the zone . XYZ pays $2,000 in unemployment insurance premiums during the year for all employees employed in the enterprise zone . ABC ' s total receipts during the taxable year are $100 , 000 , including XYZ ' s receipts of $10 , 000 . $5, 000 of XYZ's receipts are derived from trade or business in an eligible business activity in the zone . Accordingl y , the requirement in section 209E- 9(a) (2), HRS, that at least 50 per cent of the establishment's receipts , rather than the business ' receipts , be attributable to the active conduct of a trade or business in an eligible business activity, is satisfied. ABC ' s net profit before taxes is $10,000 . During the taxabl e year, ABC incorrectly claimed the general excise tax exemption on all of XYZ ' s receipts . At the end of the year when XYZ is certified to receive tax benefits, ABC must f ile the annua l general excise tax return and pay the taxes and interest on the $5, 000 that 6-24 3143 §15-6-12 was erroneously exempted from the general excise tax. ABC is entitled to a tax credit of $17.60 against the $440 in taxes owed the State, calculated as follows : (1) 5 per cent of its income is derived from sales within the zone ($5,000 divided by $100,000); and (2) 5 per cent mu l tiplied b y 80 per cent multiplied by $440(which is the tax liability before t he enterprise zone credit) is $17 . 60. ABC is also eligi ble for a credit for unemployme nt insurance premiums paid of $1,600, calculated by multiplying the $2,000 in unemployment insurance premiums paid (for employees located in the zone) by 80 per cent . Thus, ABC ' s credits under the program are $1,617.60 . As ABC ' s tax liability is $440, ABC may claim a tax credit of $440. The $1 , 177 . 60 of unusable c redi t , however, shall not be refunded to ABC nor shall it carry over or carry back . Example 4: ABC Corporation is located in an area designated as an enterprise zone. ABC is engaged in the conduct of a trade or business in an eligible business activity for several years before ABC submits an application to t he department. Under section 15-6-2, ABC ' s seven- year cycle commences on May 1 , 1993. ABC may claim the general excise tax exemption from May 1. ABC pays $500 in unemployment insurance premiums during 1993. At the end of 1993, ABC is certified to receive tax benefits . ABC determines that it owes $1,000 in net income taxes to the State under chapter 235 , HRS. When ABC files its income tax returns for the taxable year ending December 31, 1993, it is eligible for a tax credit of $533.60, cal culated as follows : (1) ABC is e ligible for the credit for 8 months of the year, from May to 6-25 ,143