Hawaii – proposed legislation would remove dividends paid
Tax Insights from State and Local Tax Services Hawaii – proposed legislation would remove dividends paid deduction for real estate investment trusts February 17, 2015 In brief On January 22, 2015, S.B. 118 was introduced in the Hawaii Senate to remove the dividends paid deduction for REITs in the state. S.B. 118 was referred to the Senate Ways and means Committee, and has been scheduled for a public hearing on February 18, 2015. The proposal could significantly increase the corporate income tax burden of REITs in the state. A similar bill, H.B. 82, was also introduced in the Hawaii House of Representatives, however, on February 4, 2015, this bill was deferred by the Committee on Consumer Protection & Commerce/Committee on Judiciary and no further action is expected. In detail Background REITs are appealing to many investors as they are exempt from federal corporate income tax as long as they pass on the income to their shareholders, through dividends. The shareholders then pay income tax on the dividends in the state or country where they are resident of or commercially domiciled, not where the property is located. Hawaii has nearly 300 REIT-owned properties, many of which have numerous shareholders that live throughout the US and internationally. Dividends paid deduction to be eliminated For federal income tax purposes, REITs are taxed under sections 857 and 858 of the Internal Revenue Code, which provide for a dividends paid deduction (DPD) for qualifying REITs. Under Hawaii Rev. Stat. sec. 235-71(d), Hawaii specifically adopts IRC sections 857 and 858, thereby providing the same dividends paid deduction at the state level for corporate income tax purposes. These federal and state deductions allow REITs to significantly decrease their taxable income and, therefore, the two levels of taxes for investors, once at the corporate level and again at the shareholder’s level. S.B. 118 would eliminate the DPD and specifically provides, “for taxable years beginning before January 1, 2016, the deduction for dividends paid is limited to such amount of dividends as attributable to taxable income, for taxable years beginning after December 31, 2015, no deduction for dividends paid shall be allowed.” The state believes that because most of these REITs are widely held and not often by Hawaii investors, the benefits of REITs investing in their state is not significant and costs the state more money in the long run. It appears that the state legislature may not have considered the impact of the overall investments REITs www.pwc.com Tax Insights provide in the state in terms of development and jobs created by these companies. The takeaway The proposed legislation has substantial impact on REITs and their shareholders as well as limits the future investments by REITs in the state. Upon approval, a REIT's tax liability may significantly increase with the removal the dividends paid deduction. REITs and investors should be aware of this impact and possible changes in their future income tax liabilities or dividends from REITs with investments in Hawaii. Let’s talk For more information on the proposed Hawaii legislation or the state taxation of REITs or their investor, in general please contact: State and Local Tax Services—Real Estate Sean Richman Kanousis Principal, New York +1 (646) 471-4858 [email protected] Sam Melehani Partner, Los Angeles +1 (213) 356-6900 [email protected] State and Local Tax Services—Asset Management Brian Rebhun Principal, New York +1 (646) 471-4024 [email protected] Bruce Graber Partner, New York +1 (646) 471-1447 [email protected] Jon Muroff Partner, Boston +1 (617) 530-4573 [email protected] Ken Turner Principal, Chicago +1 (219) 741-2144 [email protected] Steve Arluna Partner, McLean +1 (703) 918-1521 [email protected] Kevin McMillen Partner, Dallas +1 (214) 754-7913 [email protected] Paul Estrada Principal, Houston +1 (713) 356-8023 [email protected] Eran Liron Partner, San Jose +1 (408) 817-3937 [email protected] Click here to access our library of past state and local tax Insights. Stay current and connected. Our timely news insights, periodicals, thought leadership, and webcasts help you anticipate and adapt in today's evolving business environment. Subscribe or manage your subscriptions at: pwc.com/us/subscriptions © 2015 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. PwC refers to the United States member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. SOLICITATION This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. 2 pwc
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