Hawaii's Diversification/High Tech Tax Incentives - Act 221/215
In short, Act 221/215 is probably the most aggressive packages of tax incentives in the USA, providing a 100% tax credit against Hawaii State taxes, for equity investments in Qualified High Tech Companies (QHTB). Investors claim this credit front-loaded over five years. QHTB's are involved in one or more of the following activities:
Non Profit investors or investors who do not have Hawaii income tax liabilities (e.g. investors from out of state) can have their investment be claimed by other investors in the deal who do have Hawaii income tax liabilities, although the additional credit claimed is capped at 1.5 times the Hawaii tax payer's investment. This provision is to encourage Hawaii investors, who as a group have historically invested primarily in real estate, to partner with mainland investors who are more experienced in investing in "knowledge work" based companies. The mainland investors, in turn are more likely to invest when there are local investors involved.
There are other benefits including a 20% refundable tax credit for research and development (as defined by the Federal Internal Revenue Code), no Hawaii income tax on royalty income paid on the licensing of intellectual property, and more.
Here is an overview of Act 221 by Ray Kamikawa, the lawyer who as State Tax Director wrote the law, and is now in private practice helping businesses take advantage of the law. Ray Kamikawa Summary
You may obtain a comfort ruling from the State Tax Department verifying whether or not you are eligible for the benefits. Go to Department of Taxation High Tech Tax Incentives to read more and to download the draft comfort letter that you will customize for your situation. This will include inserting two or three paragraphs under "Statement of Facts" briefly describing your company, why you qualify for the tax incentives, your goals over the next five year, and why you and your team have the background to pull this off. In a two to three page Exhibit A you will elaborate on the "Statement of Facts" describing milestones for each of the projeted five years including expected jobs created and investment. You will also need to list existing owners of your company and the nature of their investment. Information on the Tax Dept. site is posted last in first out, so you will need to go to the bottom of the site to get the basic info. Also if you are reading this page offline, go to http://www.hawaii.gov/tax (the full URL is long and complicated) and then pick the quick link on the top right corner for High Tech Tax Incentives. As of January 2006 there is a $1,000 fee for reviewing proposed comfort letters This has helped to finance staff to do the reviews and is significantly speeding up the process.
Act 221 was passed in the spring of 2001 with bipartisan support in the Hawaii Legislature. In 2003 Governor Lingle expressed concern that Act 221 was going to cost too much and that it was being abused. She proposed making changes to the law and after two legislative sessions there have been some small modifications and an extension of the law until 2010 (Act 215). The controversy has made some investors and accountants skittish about using Act 221. The Tax Department has announced from time to time that they are conducting audits. However, to date I am not aware of any cases of abuse that have been made public. As with all business dealings, it is important to have a solid business plan, and be prepared to be audited.
Also when you are obtaining an equity investment you should have an appropriate accountant and lawyer review your plans and make sure you are complying with securities law, doing all of the appropriate documentation and providing the required disclosures before undertaking this kind of investment activity.
Investing in non-real estate type business investments is still very new for Hawaii and many of the lawyers and accountants are still getting up to speed, so it can be very frustrating. However over $100 million has been invested under Act 221 since 2001 as of the spring of 2004 which represents the most dramatic move towards diversifying Hawaii's economy in recent history.
Updated by David Fisher 5/23/2006