LINDA LINGLEKURT KAWAFUCHIGOVERNORDIRECTOR OF TAXATIONJAMES R. AIONA, JR.

STANLEY SHIRAKILT. GOVERNOR

DEPUTY DIRECTOR

STATE OF HAWAII

DEPARTMENT OF TAXATIONP.O. BOX 259
HONOLULU, HAWAII 96809

PHONE NO: (808) 587-1510
FAX NO: (808) 587-1560

June 7, 2010

DEPARTMENT OF TAXATION ANNOUNCEMENT NO. 2010-10
RE: Act 112, Session Laws of Hawaii 2010, Relating to Conformity of the Hawaii
Income Tax Law to the Internal Revenue Code.
On May 17, 2010, Governor Linda Lingle signed into law House Bill 2594, H.D.2, S.D.1,C.D. 1, as Act 112, Session Laws of Hawaii 2010.
NEW INFORMATION REPORTING REQUIREMENTS
Section 2 of Act 112 adds a new section to chapter 235, which adopts certain information
reporting requirements for Hawaii tax purposes that are part of the Internal Revenue Code ("Code").
The Department will use this additional information to identify delinquent taxpayers by matching
the new information provided with the gross receipts or gross income reported on a taxpayer's tax
return. The Department plans to allow taxpayers to use the forms or attached statements required forfiling with the Internal Revenue Service to be filed with the Department to satisfy these newreporting requirements. Specifically, the Department would receive the following information
reporting that will be provided to the IRS:•§6041(h) (information at source) -- conforms to a requirement in the Patient
Protection and Affordable Care Act of 2010 that requires businesses to issue Form
1099s for payments of $600 or more to corporations that are not exempt from tax
under Code Section 501(a). Previously, corporations were exempt from information
reporting requirements as the payee. This reporting requirement is effective forpayments made after December 31, 2011.

•§6038D (information with respect to foreign financial assets)-- conforms to arequirement in the Hiring Incentives to Restore Employment Act of 2010 that any
individual with "specified foreign financial assets" of $50,000 or more must report tothe Department. "Specified foreign financial assets" include foreign bank accounts,
stock or securities issued by a foreign entity, and any investment or interest in aforeign entity. This reporting requirement applies to tax years beginning after March18, 2010.

•§6045B (returns relating to actions affecting basis of specified securities.) -conforms to a requirement in the Energy Improvement and Extension Act of 2008

Department of Taxation Announcement No. 2010-10
Page 2 of 5that requires the issuers of certain securities to report certain information that affects
the basis of the securities. The effective date of this new provision is January 1,2011.
•§6050W (returns relating to payments made in settlement of payment card third partynetwork transactions) -- conforms to a requirement in the Housing Assistance Tax
Act of 2008 that requires information reporting regarding credit card transactions.
The requirement applies to calendar years beginning after December 31, 2010.

NEW INTEREST RATE FOR FUNDS HELD IN LITIGATED CLAIMS FUND
Section 3 of the Act reduces the interest rate to be paid to taxpayers on funds held in thelitigated claims fund from 8 percent to 4 percent. In 2009, Act 40, SLH 2009, reduced the interestrate for interest paid to taxpayers on overpayments from 8 percent to 4 percent.
CONFORMITY TO THE INTERNAL REVENUE CODE AS OF DECEMBER 31, 2009
In 2009, Congress enacted tax measures with the hope of stimulating the economy andproviding taxpayer relief. The tax measures that impact the state's conformity to the Internal
Revenue Code are the American Recovery and Reinvestment Act of 2009 (P.L. 111-5), ("ARRA")
enacted on February 17, 2009, and the Worker, Homeownership, and Business Assistance Act of2009 (P.L. 111-92) ("WHBA") enacted on November 6, 2009.
Section 4 of the Act amends section 235-2.3(a), HRS, to conform the Hawaii income tax law
to the operative Code sections of subtitle A, chapter 1, amended as of December 31, 2009.
Generally, subtitle A, chapter 1, refers to Code sections 1 through 1400T. Section 4 also provides
that, for purposes of the Hawaii income tax law, with respect to the following sections of the Code:•§48(d)(3) (energy grants) -- conforms to the provision that excludes from grossincome a federal energy grant paid under section 1603 of the ARRA (ARRAprovision);•§139C (COBRA premium assistance) -- does not conform to the exclusion fromgross income for a taxpayer's subsidy for continuation of COBRA coverage (ARRAprovision);•§853A (Credits from tax credit bonds allowed to shareholders) – does not conform tothe pass-through of the credit from tax credit bonds to shareholders of Regulated
Investment Companies and Real Estate Investment Trusts (ARRA provision);•§1400U-1 (allocation of recovery zone bonds) – does not conform to national
limitations on recovery zone bonds since this provision does not affect Hawaii statetax (ARRA provision);Department of Taxation Announcement No. 2010-10
Page 3 of 5•§1400U-2 (recovery zone economic development bonds) – does not conform toissuance of economic development bonds since this provision does not affect Hawaiistate tax (ARRA provision); and•

§1400U-3 (recovery zone facility bonds) -- does not conform to issuance ofeconomic development bonds since this provision does not affect Hawaii state tax(ARRA provision).

Section 5 of the Act amends section 235-2.4, HRS, with respect to conformity provisions forthe following sections of the Code:•§63 (standard deduction) – does not conform to the addition of motor vehicle sales
taxes to the standard deduction. If adopted, this provision would have allowed
individuals who cannot itemize deductions to deduct the general excise tax on amotor vehicle purchase as part of the standard deduction (ARRA provision);•§85 (unemployment compensation) – does not conform to the exclusion from grossincome of up to $2,400 of unemployment compensation benefits for 2009 (ARRAprovision);•§108 (income from discharge of indebtedness) – does not conform to section 108(i),which provides that income from reacquisitions of business debt at a discount in2009 and 2010 is deferred for up to five years, then included ratably over five years(ARRA provision);•§132 (fringe benefits) – does not conform to section 132(f)(2) that provides that themonthly exclusion for employer-provided transit passes and vanpooling benefits
increased to the same level as employer-provided parking for 2009 and 2010 (ARRAprovision). In addition, Hawaii does not conform to section 132(n) that provides anincome tax exclusion for United States Department of Defense Homeowners
Assistance Program payments authorized by the ARRA (WHBA provision);•§163 (interest deduction) – does not conform to section 163(i)(1) and 163(e)(5)(F),
which relax interest deduction rules for applicable high-yield discount obligations toaddress distressed conditions in the debt capital markets (ARRA provision);•§164 (deduction for state and local taxes) – does not conform to section 164(a)(6)and 164(b)(6), which provide an itemized deduction for general excise tax on sales ofmost new motor vehicles purchased on or after February 17, 2009 and before
January 1, 2010 (ARRA provision);•§168 (depreciation) – does not conform to the special allowances (e.g., bonus
depreciation) for certain property. Hawaii has consistently not conformed to special
allowance provisions (ARRA provision);Department of Taxation Announcement No. 2010-10
Page 4 of 5•§179 (election to expense certain depreciable assets) – does not conform to theincreased maximum deduction and phaseout amounts for 2009 (as is consistent withhistorical practice) (ARRA provision);•§265 (expenses and interest related to tax-exempt income) – does not conform to theexpansion of tax-exempt interest safe harbors for banks and small issuers forobligations issued in 2009 and 2010 (ARRA provision);•§382 (limitation on net operating loss carryforwards) – does not conform toelimination of certain loss limitation rules for restructurings under the Troubled
Asset Relief Program ("TARP") authorized by the Emergency Economic
Stabilization Act of 2008 (ARRA provision);.

•§408A (Roth Individual Retirement Accounts) – does not conform to section
408A(d)(3)(A)(iii) that provides for the ratable inclusion of the income fromconversion of a traditional IRA to a Roth IRA over a 2-year period. For Hawaii
income tax purposes, the income will all be included in the year of conversion. This
provision was enacted in 2006 but was not effective until 2010; and•§529 (tuition programs) – does not conform to including computer technology
equipment and internet access and related services as qualifying higher education
expenses for section 529 college savings plans for 2009 and 2010. (ARRAprovision).

Section 7 of the Act amends section 235-2.45, by clarifying that:•§1202 (exclusion for gain from certain small business stock) – does not conform tothe increase of the amount of gain on the sale or exchange of qualified small businessstock that noncorporate taxpayers can exclude from 50% or 60% to 75% (ARRAprovision); and•

§1374 (tax imposed on S-Corporation built-in gains) – does not conform to the
reduction of the built-in gain recognition period to 7 years from 10 years.

Section 8 of the Act amends section 235-7(d) by providing that the net operating loss
carryback period for Hawaii state tax purposes will remain at 2 years. The Act specifically provides
that Hawaii does not conform to the election to allow electing small businesses to carryback net
operating losses up to 5 years for 2008, which was part of the ARRA, and the expansion of the 5year carryback election to most businesses, not just small businesses, for 2009, which was part of theWBHA.

Department of Taxation Announcement No. 2010-10
Page 5 of 5
For more information on this Act, please contact the Rules Office at 808-587-1577.

KURT KAWAFUCHI
Director of Taxation