Hawaii Administrative Rules › Title 18 - DEPARTMENT OF TAXATION › Chapter 235 - INCOME TAX LAW › Subchapter 2 - DIVISION OF INCOME FOR TAX PURPOSES › Section 18-235-21-03 - Business and nonbusiness income application of definitions

Current through June, 2024
(a) The following are rules and examples for
				determining whether particular income is business or nonbusiness income. (The
				examples used throughout these rules are illustrative only and do not purport
				to set forth all pertinent facts.)
(b) Rental income from real and tangible
				property is business income if the property with respect to which the rental
				income was received is used in the taxpayer's trade or business or incidental
				to it and therefore is includable in the property factor under sections
				18-235-30-01 to 18-235-30-04.
Example 1:
The taxpayer operates a multistate
				  car rental business. The income from car rentals is business income.
Example 2:
The taxpayer is engaged in the heavy
				  construction business in which it uses equipment such as cranes, tractors, and
				  earth-moving vehicles. The taxpayer makes short-term leases of the equipment
				  when particular pieces of equipment are not needed on any particular project.
				  The rental income is business income.
Example 3:
The taxpayer operates a multistate
				  chain of clothing stores. The taxpayer purchases a five-story office building
				  for use in connection with its trade or business. It uses the street floor as
				  one of its retail stores and the second and third floors for its general
				  corporate headquarters. The taxpayer manages and leases the remaining two
				  floors to others. The rental of the two floors is incidental to the operation
				  of the taxpayer's trade or business. The rental income is business
				  income.
Example 4:
The taxpayer operates a multistate
				  chain of grocery stores. It purchases as an investment an office building in
				  another state with surplus funds and hires an unrelated property management
				  company to manage and lease the entire building to others. The net rental
				  income is not business income of the grocery store trade or business.
				  Therefore, the net rental income is nonbusiness income.
Example 5:
The taxpayer operates a multistate
				  chain of clothing stores. The taxpayer invests in a twenty-story office
				  building and uses the street floor as one of its retail stores and the second
				  floor for its general corporate headquarters. The taxpayer hires an unrelated
				  property management company to manage and lease the remaining eighteen floors
				  to others. The rental of the eighteen floors is not incidental to but rather is
				  separate from the operation of the taxpayer's trade or business. The net rental
				  -income is not business income of the clothing store trade or business.
				  Therefore, the net rental income is nonbusiness income.
Example 6:
The taxpayer constructed a plant for
				  use in its multistate manufacturing business and twenty years later the plant
				  was closed and put up for sale. The plant was rented for a temporary period
				  from the time it was closed by the taxpayer until it was sold eighteen months
				  later. The rental income is business income and the gain on the sale of the
				  plant is business income.
Example 7:
The taxpayer operates a multistate
				  chain of grocery stores. It owned an office building which it occupied as its
				  corporate headquarters. Because of inadequate space, taxpayer acquired a new
				  and larger building elsewhere for its corporate headquarters. The taxpayer
				  hired an unrelated property management company to manage and lease the old
				  building. The property management company leased the building to an unrelated
				  investment company under a five-year lease. Upon expiration of the lease,
				  taxpayer sold the building at a gain (or loss). The net rental income received
				  over the lease period is nonbusiness income and the gain (or loss) on the sale
				  of the building is nonbusiness income.
(c) Gain or loss from the sale, exchange, or
				other disposition of real property or of tangible or intangible personal
				property constitutes business income if the property while owned by the
				taxpayer was used in, available for, or capable of being used in the taxpayer's
				trade or business. However, if the property was utilized for the production of
				nonbusiness income or otherwise was removed from the property factor before its
				sale, exchange, or other disposition, the gain or loss will constitute
				nonbusiness income. See sections 18-235-30-01 to 18-235-30-04.
Example 1:
In conducting its multistate
				  manufacturing business, the taxpayer systematically replaces automobiles,
				  machines, and other equipment used in the business. The gains or losses
				  resulting from those sales constitute business income.
Example 2:
The taxpayer constructed a plant for
				  use in its multistate manufacturing business and twenty years later sold the
				  property at a gain while it was in operation by the taxpayer. The gain is
				  business income.
Example 3:
Same as Example 2 except that the
				  plant was closed and put up for sale but was not in fact sold until a buyer was
				  found 18 months later. The gain is business income.
Example 4:
Same as Example 2 except that the
				  plant was rented while being held for sale. The rental income is business
				  income and the gain on the sale of the plant is business income.
Example 5:
The taxpayer operates a multistate
				  chain of grocery stores. It owned an office building which it occupied as its
				  corporate headquarters. Because of inadequate space, taxpayer acquired a new
				  and larger building elsewhere for its corporate headquarters. The taxpayer
				  hired an unrelated property management company to manage and lease the old
				  building. The property management company leased the building to an unrelated
				  investment company under a five-year lease. Upon expiration of the lease,
				  taxpayer sold the building at a gain (or loss). The gain (or loss) on the sale
				  is nonbusiness income and the rental income received over the lease period is
				  nonbusiness income.
(d) Interest
				income is business income where the intangible with respect to which the
				interest was received arises out of or was created in the regular course of the
				taxpayer's trade or business operations, or where the purpose for acquiring and
				holding the intangible is related to or incidental to those trade or business
				operations.
Example 1:
The taxpayer operates a multistate
				  chain of department stores, selling for cash and on credit. Service charges,
				  interest, or time-price differentials and the like are received with respect to
				  installment sales and revolving charge accounts. These amounts are business
				  income.
Example 2:
The taxpayer conducts a multistate
				  manufacturing business. During the year the taxpayer receives a federal income
				  tax refund and collects a judgment against a debtor of the business. Both the
				  tax refund and the judgment bear interest. The interest income is business
				  income.
Example 3:
The taxpayer is engaged in a
				  multistate manufacturing and wholesaling business. In connection with that
				  business, the taxpayer maintains special accounts to cover such items as
				  worker's compensation claims, rain and storm damage, and machinery replacement.
				  The moneys in those accounts are invested at interest. Similarly, the taxpayer
				  temporarily invests funds intended for payment of federal, state, and local tax
				  obligations. The interest income is business income.
Example 4:
The taxpayer is engaged in a
				  multistate money order and traveler's check business. In addition to the fees
				  received in connection with the sale of the money orders and traveler's checks,
				  the taxpayer earns interest income by the investment of the funds pending their
				  redemption. The interest income is business income.
Example 5:
The taxpayer is engaged in a
				  multistate manufacturing and selling business. The taxpayer usually has working
				  capital and extra cash totaling $200,000 which it regularly invests in
				  short-term interest bearing securities. The interest income is business
				  income.
(e) Dividends are business
				income where the stock with respect to which the dividends are received arises
				out of or was acquired in the regular course of the taxpayer's trade or
				business operations or where the purpose of acquiring and holding the stock is
				related to or incidental to those trade or business operations.
Example 1:
The taxpayer operates a multistate
				  chain of stock brokerage houses. During the year, the taxpayer receives
				  dividends on stock that it owns. The dividends are business income.
Example 2:
The taxpayer is engaged in a
				  multistate manufacturing and wholesaling business. In connection with that
				  business, the taxpayer maintains special accounts to cover such items as
				  worker's compensation claims. A portion of the moneys in those accounts is
				  invested in interest-bearing bonds. The remainder is invested in various common
				  stocks listed on national stock exchanges. Both the interest income and any
				  dividends are business income.
Example 3:
The taxpayer and several unrelated
				  corporations own all of the stock of a corporation whose business operations
				  consist solely of acquiring and processing materials for delivery to the
				  corporate owners. The taxpayer acquired the stock in order to obtain a source
				  of supply of materials used in its manufacturing business. The dividends are
				  business income.
Example 4:
The taxpayer is engaged in a
				  multistate heavy construction business. Much of its construction work is
				  performed for agencies of the federal government and various state governments.
				  Under state and federal laws applicable to contracts for these agencies, a
				  contractor must have adequate bonding capacity, as measured by the ratio of its
				  current assets (cash and marketable securities) to current liabilities. In
				  order to maintain an adequate bonding capacity the taxpayer holds various
				  stocks and interest-bearing securities. Both the interest income and any
				  dividends received are business income.
Example 5:
The taxpayer receives dividends from
				  the stock of its subsidiary or affiliate which acts as the marketing agency for
				  products manufactured by the taxpayer. The dividends are business
				  income.
(f) Patent and copyright
				royalties are business income where the patent or copyright with respect to
				which the royalties were received arises out of or was created in the regular
				course of the taxpayer's trade or business operations or where the purpose for
				acquiring and holding the patent or copyright is related to or incidental to
				those trade or business operations.
Example 1:
The taxpayer is engaged in the
				  multistate business of manufacturing and selling industrial chemicals. In
				  connection with that business, the taxpayer obtained patents on certain of its
				  products. The taxpayer licensed the production of the chemicals in foreign
				  countries, in return for which the taxpayer receives royalties. The royalties
				  received by the taxpayer are business income.
Example 2:
The taxpayer is engaged in the music
				  publishing business and holds copyrights on numerous songs. The taxpayer
				  acquires the assets of a smaller publishing company, including music
				  copyrights. These acquired copyrights are thereafter used by the taxpayer in
				  its business. Any royalties received on these copyrights are business
				  income.