Hawaii Issues Revised PTET Guidance

By Krista A. Cohane

The Hawaii Department of Taxation has issued a revised Tax Information Release providing guidance on changes to the pass-through entity tax (PTET), and providing notice of proposed temporary administrative rules relating to the PTET and its accompanying credit. Entities without qualified members are no longer eligible to elect PTE taxation, and the guidance clarifies the PTET’s tax base, new definition of qualified member, and rate. The release replaces and supersedes Hawaii Tax Information Release No. 2023-03, 12/27/2023. (Hawaii Tax Information Release No. 2024-01, 08/15/2024.)

Qualified member.

The explanation of multi-tiered entities is removed from the guidance as well as the definition of “lower-tier PTE” and “upper-tier PTE.” The definition of “qualified member” has been redefined to mean a member of an electing PTE that is an individual, trust, or estate whose distributive shares and guaranteed payments are subject to PTET for the taxable year. A single-member limited liability company treated as a disregarded entity for federal tax purposes will constitute an individual for purposes of the PTET and will be considered a qualified member.

Entities that may elect PTET.

The PTET is imposed on the sum of the distributive shares and guaranteed payments of all “qualified members.” PTEs without qualified members are no longer eligible to elect PTE taxation. Certain multi-tiered entities, including formerly qualified PTEs that do not have any qualified members, are not eligible for the PTET even if they have already elected it or made estimated payments for tax years after December 31, 2023. Multi-tiered entities that are no longer eligible for PTE taxation should contact the Department regarding changes in their eligibility due to legislative changes.

PTET rate.

Applicable to taxable years beginning after December 31, 2023, the PTET rate is 9%. Previously the rate was the highest rate of tax applicable to the individual under Haw. Rev. Stat. §235-51. Additionally, the PTET credit can be carried forward for subsequent years until exhausted.

Estimated tax payments.

For tax year 2024, electing PTEs will not be penalized for failing to make the first two estimated payments or making unequal payments due to recent changes in the PTET rate. Electing PTEs that have not made the first two estimated payments must timely remit the final two estimated payments for tax year 2024, and PTEs that have already made estimated payments based on the prior PTET rate should adjust subsequent estimated payments to account for the new 9% rate.

Required schedule filing.

Trusts or estates that receive PTE credits as qualified members of electing PTEs and pass those credits on to beneficiaries on Form N-40 Schedule K-1 must file Schedule PTE-U (Upper-Tier Pass-Through Entity Tax Credit Allocation) to report the allocation of the PTE credit received from the electing PTEs to the trust’s beneficiaries.