The Hawaiʻi Tax Credit for Research Activities (TCRA), also known as the Hawaiʻi R&D Tax Credit, is a significant financial incentive for businesses in Hawaiʻi that are involved in the development of new products or services. This tax credit allows eligible high-tech businesses, those that conduct more than 50% of their activities in qualified research, to claim a refundable credit against their corporate or personal income tax for expenses incurred in research activities. This benefit is particularly valuable for fostering innovation and technological advancement within the state.
The TCRA at a Glance
When and who introduced the law. What was the legislative intent?
- TCRA was reenacted under Act 270, Session Laws of Hawaiʻi 2013. The TCRA is intended to encourage taxpayers to design, develop, and/or improve products, processes, techniques, formulas, or software.
- The Act adopts §41 of the Internal Revenue Code (IRC) as of December 31, 2011, with the further requirement that Qualified Research Expenses (QREs) do not include research expenses incurred outside of the State.
Who are the parties involved in administering it?
- HTDC – Set-up, Reviews, & Fulfillment
- HTDC & CID – Reviews & Fulfillment
- DOTAX – Final review & Approval
What is the cap on the R&D tax credit?
- $5M
How do companies access this tax credit?
Here are the steps for applying for the R&D Tax Credit initiatives in Hawaiʻi:
| Eligibility | The R&D Tax Credit is available for companies developing new products and services in Hawaiʻi. Hawaiʻi allows a refundable credit against corporate or personal income tax for expenditures. |
| Credit Calculation | The credit is generally based on the federal research credit allowed under IRC Sec. 41 and is available for years 2013 through 2024. The credit is equal to 20% of the qualified research expenditures incurred for the taxable year. |
| Application Submission – Part A | Applicants eligible for the credit must submit an application to the Department of Business, Economic Development, and Tourism (DBEDT) by the 31st of March. |
| Questionnaire/Survey – Part B | Taxpayers also must complete an online questionnaire containing the details of the qualifying expenditures, revenue and expense data, intellectual property filings, and information about related businesses. This survey must be completed by the 31st of March. |
| Credit Certification | HTDC/CID will certify credit claims on a first-come, first-served basis and will stop certifying once the amount claimed has reached a cap of $5 million. |
| Tax Return Submission | Upon approval, HTDC will issue a signed N-346A form. This form, along with Hawaiʻi Form N-346 and Federal Form 6765, must be included in the applicable Hawaiʻi income tax return. |
| Final Review | DOTAX will conduct the final review of the application and approve or deny the application. |
Applicants are disqualified if their questionnaires are not submitted by the deadline.
When does it go live and what is the timeline?
- R&D Tax Credit goes live on March 1st and end March 31st at 5:00pm HST
When are awardees notified?
- The awardees are notified once the Form N346-A is signed by the Director of DBEDT Between the 1st and 2nd week of June.
Are the R&D Tax credit confirmed once the awardee is notified by HTDC?
No, once the preliminary processing is completed by HTDC/CID, DOTAX will then take over and proceed with the final review and approval process.
What does the current and new statute state and criteria?
| Current Rules: | Updated Rules: |
|---|---|
| Provided that references to the base amount in section 41 of the internal revenue code shall not apply, and credit for all qualified research expenses may be taken without regard to the amount of expenses for previous years. | Rule has been removed |
| Sunset date 12/31/2024 | Sunset date 12/31/2029 |
| “Qualified high technology business”[shall have the same meaning as in section 235—7.3 i.e Revised Statutes § 235-7.3, “Qualified Research” refers to specific types of research activities that qualify for certain tax exclusions. | Changed to “Qualified high technology business” means a small business that conducts more than 50% of its activities in qualified research in the State and is registered to do business in the State. |
| “Small business” not defined | Changed to “Small business” defined as a company with no more than 500 employees.” |
Overview of the Hawaiʻi Tax Credit for research activities for tax year 2023
The application was open on March 1st at 9:00am. The first application for the tax credit was submitted at 9:00:29 AM, and the last qualifying application was received at 9:01:05 AM. This means that the tax credit was depleted in just 65 seconds.
In total, there were 32 companies that applied:
- 11 companies were eligible.
- 21 companies were deemed ineligible as the funds had already been exhausted.
Want to Learn More?
If you are interested in learning how you can take advantage of this Tax Credit program, please contact us to discuss your needs and situation.