REPORT TITLE:
Business Expense Deduction


DESCRIPTION:
Increases income tax deductions for businesses from 50% to 100%
for meals and entertainment expenses.  Allows business
entertainment deduction for club dues.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                        
THE SENATE                              S.B. NO.           57
TWENTIETH LEGISLATURE, 1999                                
STATE OF HAWAII                                            
                                                             
________________________________________________________________
________________________________________________________________


                   A  BILL  FOR  AN  ACT

RELATING TO THE INCOME TAX.



BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

 1      SECTION 1.  Section 235-2.4, Hawaii Revised Statutes, is
 
 2 amended to read as follows:
 
 3      "235-2.4  Operation of certain Internal Revenue Code
 
 4 provisions.(a)  Section 63 (with respect to taxable income
 
 5 defined) of the Internal Revenue Code shall be operative for the
 
 6 purposes of this chapter, except that the standard deduction
 
 7 amount in section 63(c) of the Internal Revenue Code shall
 
 8 instead mean:
 
 9      (1)  $1,900 in the case of:
 
10           (A)  A joint return as provided by section 235-93, or
 
11           (B)  A surviving spouse (as defined in section 2(a) of
 
12                the Internal Revenue Code),
 
13      (2)  $1,650 in the case of a head of household (as defined
 
14           in section 2(b) of the Internal Revenue Code),
 
15      (3)  $1,500 in the case of an individual who is not married
 
16           and who is not a surviving spouse or head of household,
 
17           or
 
18      (4)  $950 in the case of a married individual filing a
 
19           separate return. 
 

 
Page 2                                                     
                                     S.B. NO.           57
                                                        
                                                        

 
 1 Section 63(c)(4) shall not be operative in this State.  Section
 
 2 63(c)(5) shall be operative, except that the limitation on basic
 
 3 standard deduction in the case of certain dependents shall be the
 
 4 greater of $500 or such individual's earned income.  Section
 
 5 63(f) shall not be operative in this State.
 
 6      (b)  Section 72 (with respect to annuities; certain proceeds
 
 7 of endowment and life insurance contracts) of the Internal
 
 8 Revenue Code shall be operative for purposes of this chapter and
 
 9 be interpreted with due regard to section 235-7(a), except that
 
10 the ten per cent additional tax on early distributions from
 
11 retirement plans in section 72(t) shall not be operative for
 
12 purposes of this chapter.
 
13      (c)  Section 121 (with respect to exclusion of gain from
 
14 sale of principal residence) of the Internal Revenue Code shall
 
15 be operative for purposes of this chapter, except that for the
 
16 election under section 121(f), a reference to section 1034
 
17 treatment means a reference to section 235-2.4(n) in effect for
 
18 taxable year 1997.
 
19      (d)  Section 213 (with respect to medical, dental, etc.,
 
20 expenses) of the Internal Revenue Code shall be operative, except
 
21 that subsections (d)(1)(C) with respect to long-term care
 
22 services, (d)(1)(D) as it applies to long-term care insurance
 

 
 
 
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                                     S.B. NO.           57
                                                        
                                                        

 
 1 contract premiums, (d)(7) as it applies to long-term care
 
 2 insurance contract premiums, and (d)(10) as it applies to
 
 3 eligible long-term care premiums shall not be operative in this
 
 4 State.
 
 5      (e)  Section 219 (with respect to retirement savings) of the
 
 6 Internal Revenue Code shall be operative for the purpose of this
 
 7 chapter.  For the purpose of computing the limitation on the
 
 8 deduction for active participants in certain pension plans for
 
 9 state income tax purposes, adjusted gross income as used in
 
10 section 219 as operative for this chapter means federal adjusted
 
11 gross income.
 
12      (f)  Section 220 (with respect to medical savings accounts)
 
13 of the Internal Revenue Code shall be operative for the purpose
 
14 of this chapter, but only with respect to medical services
 
15 accounts that have been approved by the secretary of the Treasury
 
16 of the United States.
 
17      (g)  Section 274 (with respect to disallowance of certain
 
18 entertainment expenses) of the Internal Revenue Code shall be
 
19 operative for the purposes of this chapter except:
 
20      (1)  Subsection (a)(3) shall not be operative and a
 
21           deduction for club dues shall be allowed; and
 
22      (2)  Subsection (n) shall not be operative and meal and
 

 
 
 
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                                     S.B. NO.           57
                                                        
                                                        

 
 1           entertainment expenses shall be one hundred per cent
 
 2           deductible for purposes of this chapter.
 
 3      [(g)] (h)  In administering the provisions of sections 410
 
 4 to 417 (with respect to special rules relating to pensions,
 
 5 profit sharing, stock bonus plans, etc.), sections 418 to 418E
 
 6 (with respect to special rules for multiemployer plans), and
 
 7 sections 419 and 419A (with respect to treatment of welfare
 
 8 benefit funds) of the Internal Revenue Code, the department of
 
 9 taxation shall adopt rules under chapter 91 relating to the
 
10 specific requirements under such sections and to such other
 
11 administrative requirements under those sections as may be
 
12 necessary for the efficient administration of sections 410 to
 
13 419A.
 
14      In administering sections 401 to 419A (with respect to
 
15 deferred compensation) of the Internal Revenue Code, Public Law
 
16 93-406, section 1017(i), shall be operative for the purposes of
 
17 this chapter.
 
18      In administering section 402 (with respect to the taxability
 
19 of beneficiary of employees' trust) of the Internal Revenue Code,
 
20 the tax imposed on lump sum distributions by section 402(e) of
 
21 the Internal Revenue Code shall be operative for the purposes of
 
22 this chapter and the tax imposed therein is hereby imposed by
 

 
 
 
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                                     S.B. NO.           57
                                                        
                                                        

 
 1 this chapter at the rate determined under this chapter.
 
 2      [(h)] (i)  Section 468B (with respect to special rules for
 
 3 designated settlement funds) of the Internal Revenue Code shall
 
 4 be operative for the purposes of this chapter and the tax imposed
 
 5 therein is hereby imposed by this chapter at a rate equal to the
 
 6 maximum rate in effect for the taxable year imposed on estates
 
 7 and trusts under section 235-51.
 
 8      [(i)] (j)  Section 469 (with respect to passive activities
 
 9 and credits limited) of the Internal Revenue Code shall be
 
10 operative for the purposes of this chapter.  For the purpose of
 
11 computing the offset for rental real estate activities for state
 
12 income tax purposes, adjusted gross income as used in section 469
 
13 as operative for this chapter means federal adjusted gross
 
14 income.
 
15      [(j)] (k)  Sections 512 to 514 (with respect to taxation of
 
16 business income of certain exempt organizations) of the Internal
 
17 Revenue Code shall be operative for the purposes of this chapter
 
18 as provided in this subsection.
 
19      "Unrelated business taxable income" means the same as in the
 
20 Internal Revenue Code, except that in the computation thereof
 
21 sections 235-3 to 235-5, and 235-7 (except subsection (c)), shall
 
22 apply, and in the determination of the net operating loss
 

 
 
 
Page 6                                                     
                                     S.B. NO.           57
                                                        
                                                        

 
 1 deduction there shall not be taken into account any amount of
 
 2 income or deduction which is excluded in computing the unrelated
 
 3 business taxable income.  Unrelated business taxable income shall
 
 4 not include any income from a prepaid legal service plan.
 
 5      For a person described in section 401 or 501 of the Internal
 
 6 Revenue Code, as modified by section 235-2.3, the tax imposed by
 
 7 section 235-51 or 235-71 shall be imposed upon the person's
 
 8 unrelated business taxable income.
 
 9      [(k)] (l)  Section 521 (with respect to cooperatives) and
 
10 subchapter T (sections 1381 to 1388, with respect to cooperatives
 
11 and their patrons) of the Internal Revenue Code shall be
 
12 operative for the purposes of this chapter as to any cooperative
 
13 fully meeting the requirements of section 421-23, except that
 
14 Internal Revenue Code section 521 cooperatives need not be
 
15 organized in Hawaii.
 
16      [(l)] (m)  Sections 527 (with respect to political
 
17 organizations) and 528 (with respect to certain homeowners
 
18 associations) of the Internal Revenue Code shall be operative for
 
19 the purposes of this chapter and the taxes imposed in each such
 
20 section are hereby imposed by this chapter at the rates
 
21 determined under section 235-71.
 
22      [(m)] (n)  Section 641 (with respect to imposition of tax)
 

 
 
 
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                                     S.B. NO.           57
                                                        
                                                        

 
 1 of the Internal Revenue Code shall be operative for the purposes
 
 2 of this chapter subject to the following:
 
 3      (1)  The deduction for exemptions shall be allowed as
 
 4           provided in section 235-54(b).
 
 5      (2)  The deduction for contributions and gifts in
 
 6           determining taxable income shall be limited to the
 
 7           amount allowed in the case of an individual, unless the
 
 8           contributions and gifts are to be used exclusively in
 
 9           the State.
 
10      (3)  The tax imposed by section 1(e) of the Internal Revenue
 
11           Code as applied by section 641 of the Internal Revenue
 
12           Code is hereby imposed by this chapter at the rate and
 
13           amount as determined under section 235-51 on estates
 
14           and trusts.
 
15      [(n)] (o)  Section 644 (with respect to special rule for
 
16 gain on property transferred to trust at less than fair market
 
17 value) of the Internal Revenue Code shall be operative for the
 
18 purposes of this chapter and the tax imposed therein is hereby
 
19 imposed by this chapter at the rate determined under this
 
20 chapter; except that the determination of the interest rate
 
21 established under section 6621 of the Internal Revenue Code
 
22 referred to in section 644(a)(2) of the Internal Revenue Code
 

 
 
 
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                                     S.B. NO.           57
                                                        
                                                        

 
 1 shall instead be the interest rate established under section 231-
 
 2 39(b)(4).
 
 3      [(o)] (p)  Section 667 (with respect to treatment of amounts
 
 4 deemed distributed by trusts in preceding years) of the Internal
 
 5 Revenue Code shall be operative for the purposes of this chapter
 
 6 and the tax imposed therein is hereby imposed by this chapter at
 
 7 the rate determined under this chapter; except that the reference
 
 8 to tax-exempt interest to which section 103 of the Internal
 
 9 Revenue Code applies in section 667(a) of the Internal Revenue
 
10 Code shall instead be a reference to tax-exempt interest to which
 
11 section 235-7(b) applies.
 
12      [(p)] (q)  Section 685 (with respect to treatment of
 
13 qualified funeral trusts) of the Internal Revenue Code shall be
 
14 operative for purposes of this chapter, except that the tax
 
15 imposed under this chapter shall be computed at the tax rates
 
16 provided under section 235-51, and no deduction for the exemption
 
17 amount provided in section 235-54(b) shall be allowed.  The cost-
 
18 of-living adjustment determined under section 1(f)(3) of the
 
19 Internal Revenue Code shall be operative for the purpose of
 
20 applying section 685(c)(3) under this chapter.
 
21      [(q)] (r)  Section 1212 (with respect to capital loss
 
22 carrybacks and carryforwards) of the Internal Revenue Code shall
 

 
 
 
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                                     S.B. NO.           57
                                                        
                                                        

 
 1 be operative for the purposes of this chapter; except that for
 
 2 the purposes of this chapter the capital loss carryback
 
 3 provisions of section 1212 shall not be operative and the capital
 
 4 loss carryforward allowed by section 1212(a) shall be limited to
 
 5 five years.
 
 6      [(r)] (s)  Subchapter S (sections 1361 to 1379) (with
 
 7 respect to tax treatment of S corporations and their
 
 8 shareholders) of chapter 1 of the Internal Revenue Code shall be
 
 9 operative for the purposes of this chapter as provided in part
 
10 VII.
 
11      [(s)] (t)  Subchapter C (sections 6221 to 6233) (with
 
12 respect to tax treatment of partnership items) of chapter 63 of
 
13 the Internal Revenue Code shall be operative for the purposes of
 
14 this chapter.
 
15      [(t)] (u)  Subchapter D (sections 6240 to 6255) (with
 
16 respect to simplified audit procedures for electing large
 
17 partnerships) of the Internal Revenue Code shall be operative for
 
18 the purposes of this chapter, with due regard to chapter 232
 
19 relating to tax appeals.
 
20      [(u)] (v)  Section 7518 (with respect to capital
 
21 construction fund for commercial fishers) of the Internal Revenue
 
22 Code shall be operative for the purposes of this chapter.
 

 
 
 
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                                     S.B. NO.           57
                                                        
                                                        

 
 1 Qualified withdrawals for the acquisition, construction, or
 
 2 reconstruction of any qualified asset which is attributable to
 
 3 deposits made before the effective date of this section shall not
 
 4 reduce the basis of the asset when withdrawn.  Qualified
 
 5 withdrawals shall be treated on a first-in-first-out basis."
 
 6      SECTION 2.  Statutory material to be repealed is bracketed.
 
 7 New statutory material is underscored.
 
 8      SECTION 3.  This Act upon its approval shall apply to
 
 9 taxable years beginning after December 31, 1998.
 
10 
 
11                           INTRODUCED BY:  _______________________