Hawaii R&D Tax Credit

The state of Hawaii offers firms an opportunity to benefit from the R&D tax credit. Firms can use the credit to reduce their state and federal tax bills by offsetting expenses in qualified research activities.

Unfortunately, corporations frequently fail to take advantage of the Hawaii research and development tax credit for various reasons. But that doesn’t mean you have to miss out on its important benefits as well. To help you successfully claim your R&D tax credit, let’s examine the application process more closely.

Hawaii Research Tax Credit Explained

Hawaii R&D tax credit (§235‒110.91) is similar to its federal counterpart offered by IRC § 41. However, to apply, high technology businesses (QHTBs) must conduct research activities in Hawaii. The credit is equivalent to the federal credit shown on Form 6765, times the proportion of Hawaii’s costs to the total federal expenditures.

That said, the fundable income tax credit has a $5 million yearly maximum. Because of this limit, the Department of Business, Economic Development, and Tourism (DBEDT) certifies credits on a first-come, first-served basis. In 2021, the $5 million maximum was almost immediately met once the online applications were made available. That proves that speed plays an important role when applying.

The Process

Step 1

Upload the completed, signed N346a form.

• If you are a calendar year filer, you must submit the 2020 Hawaii Form N-346A by March 30. The online application opens on March 1.

• If you are a fiscal year filer, you must submit it the day before the last day of the third month after the end of the tax year.

Step 2

Each QHTB requesting the R&D credit must provide the DBEDT with a certified declaration detailing any qualified expenses incurred in the past tax year. Moreover, a QHTB needs to deliver the number of tax credits that were claimed in the previous taxable year.

Step 3

After considering the QRE values, the credit amount certified for each taxable year, and the total number of tax credits claimed for the credit period, DBEDT will issue a certificate. Then a QHTB needs to submit this certificate to the Department of Taxation together with its tax return.

After that, the Department will send Part II of Form N-346A to the QHTB at the address presented on the front of Form N-346A. The QHTB must attach the completed Part II to Form N-346.

Step 4

If approved, a QHTB must claim the credit, including any revised claims, within 12 months after the end of the tax year. By June 30 of each year, QHTBs claiming the credit must finish and submit an annual survey to the DBEDT.

Refunds

You must submit refund requests no later than the end of the 12th month after the end of the tax year for which the credit is granted. In other words, within one year.

What Is Considered a Qualified High Technology Business

A QHTB is a company that undertakes more than 50% of its operations in qualified research. That includes:

• Everything mentioned in the Internal Revenue Code Section 41(d)

• The design and development of computer software with the intention of selling, renting, licensing, or otherwise marketing it for a profit. The company must have extensive control over the creation and design of the program and maintain substantial rights to the resulting intellectual property.

• Biotechnology

• Performing arts products

• Astronomy

• Sensor and optic technologies

• Technology related to non-fossil fuel energy

• Ocean sciences

How to Calculate the Hawaii Research Tax Credit

Take the amount of the federal tax credit from Form 6765 and multiply it with the percentage of qualifying research costs incurred in Hawaii.

Hawaii Research and Development Tax Credit: Summary

To claim the Hawaii R&D tax credit, you must first get certification from the Department of Taxation. Taxpayers who want to get the credit need to (a) deliver to the Department a fully completed Form N346A, as well as (b) send the Department-issued certificate along with their tax return. Taxpayers can use Form N-346A to provide the relevant certification information to acquire the requisite certificate for the tax year.

Moreover, each QHTB needs to submit a written, certified statement detailing the number of tax credits claimed and every qualified expense made during the taxable year. The due date is March 31 of the year following the taxable year.

Unfortunately, the R&D tax program in Hawaii is only approved by December 31, 2024. That means it will end if no new law is issued by the appointed date.

FAQs

What kind of companies can apply in Hawaii?

Partnerships, LLCs, S-Corporations, C-Corporation

What is the deadline for applying in Hawaii?

You must submit your application together with the Hawaii Tax Return.

What data do I need to calculate credit in Hawaii?

Claim period QREs (Qualified R&D Expenses)

What information do I need to provide?

Federal QREs for the claim period.

Is credit carryforward an option in Hawaii?

No — the excess can be refunded.