Hawaii — Corporate Income / Franchise Tax

Hawaii imposes a corporate income tax on all corporations—both foreign and domestic—that have income received or derived from property owned, trade or business carried on, or any other source in the state. Hawaii Revised Statutes § 235-4(d), first sentence, establishes that "[a] corporation, foreign or domestic, is taxable upon the income received or derived from property owned, trade or business carried on, and any and every other source in the State."

Domestic corporations (those organized under Hawaii law) are additionally taxable on income from property and business outside Hawaii unless that income is subjected to income tax in another jurisdiction. The second sentence of § 235-4(d) provides: "In addition thereto a domestic corporation is taxable upon its income from property owned, trade or business carried on, and any and every other source outside the State, unless subjected to income tax thereon in any other jurisdiction."

Federal Tax Does Not Constitute Subjection in Another Jurisdiction

The third sentence of Hawaii Revised Statutes § 235-4(d) clarifies what "subjected to income tax thereon in any other jurisdiction" means: "Subjection to federal tax does not constitute subjection to income tax in another jurisdiction." This means that a Hawaii domestic corporation cannot avoid Hawaii tax on its out-of-state income merely because that income is subject to federal corporate income tax. To qualify for the exclusion, the out-of-state income must actually be subject to income tax imposed by another state, territory, or foreign country.

This rule prevents Hawaii domestic corporations from escaping Hawaii taxation on their worldwide income simply by paying federal tax. A Hawaii corporation doing business solely within Hawaii and in states where it lacks nexus (and thus pays no other state income tax) remains subject to Hawaii tax on that out-of-state income, even though the income is included in the corporation's federal taxable income and subject to federal corporate income tax.

Entities Exempt from Chapter 235

Certain financial institutions taxable under Hawaii Revised Statutes Chapter 241 are exempt from Chapter 235. These institutions pay tax under Hawaii's separate franchise tax regime for financial institutions rather than under the general corporate income tax.

Source: Haw. Rev. Stat. § 235-4(d)

Hawaii imposes a graduated corporate income tax on taxable income at three rates: 4.4% on taxable income up to $25,000; 5.4% on taxable income over $25,000 but not over $100,000; and 6.4% on all taxable income over $100,000. These rates apply to corporations subject to tax under Chapter 235, with certain exceptions for regulated investment companies and real estate investment trusts that have separate rate provisions.

Source: Haw. Rev. Stat. § 235-71

A corporation lacking physical presence in Hawaii is presumed to be systematically and regularly engaging in business in the state and subject to corporate income tax if, during the current or preceding calendar year, either: (1) the corporation engages in 200 or more business transactions with persons within Hawaii, or (2) the sum of the corporation's gross income attributable to sources in Hawaii equals or exceeds $100,000 (or for corporations doing business both within and outside Hawaii, the numerator of the sales factor equals or exceeds $100,000). This economic nexus standard applies to taxable years beginning after December 31, 2019.

Source: Haw. Rev. Stat. § 235-4.2

Hawaii apportions business income of multistate corporations using an equally weighted three-factor formula under the Uniform Division of Income for Tax Purposes Act (UDITPA). The apportionment percentage is calculated by adding the property factor, payroll factor, and sales factor, then dividing the sum by three. Each factor is a fraction: the numerator represents the corporation's activity in Hawaii, and the denominator represents total activity everywhere. If any factor's denominator is zero, that factor is excluded from both the numerator and denominator of the apportionment fraction. The property factor uses average values of real and tangible personal property owned or rented and used in the state. The payroll factor measures compensation paid in Hawaii. The sales factor reflects sales attributable to Hawaii under specific sourcing rules.

Source: Haw. Rev. Stat. § 235-29

Hawaii corporations must file their corporate income tax return on or before the twentieth day of the fourth month following the close of the taxable year. For a calendar-year corporation, this means the return is due April 20. An automatic six-month extension is available if the taxpayer pays the properly estimated tax liability by the original due date; no extension form is required.

Source: Haw. Rev. Stat. § 235-97(b)

Hawaii uses distinct sourcing rules for tangible personal property and intangible property or services when calculating the sales factor numerator of the apportionment formula.

Tangible Personal Property

Sales of tangible personal property are sourced to Hawaii if either: (1) the property is delivered or shipped to a purchaser, other than the United States government, within Hawaii regardless of the f.o.b. point or other conditions of the sale; or (2) the property is shipped from an office, store, warehouse, factory, or other place of storage in Hawaii and either (A) the purchaser is the United States government or (B) the taxpayer is not taxable in the state of the purchaser. This follows the standard UDITPA destination-based sourcing for tangible property, with a throwback rule for sales to states where the taxpayer lacks nexus.

Intangible Property and Services — Market-Based Sourcing (Tax Years Beginning After December 31, 2019)

For tax years beginning after December 31, 2019, Hawaii sources sales other than sales of tangible personal property using market-based sourcing. Sales are in Hawaii: (1) in the case of intangible property, to the extent the intangible property is used in Hawaii; or (2) in the case of a service, to the extent the service is used or consumed in Hawaii. This shift from cost-of-performance sourcing to market-based sourcing was enacted by Act 96, Session Laws of Hawaii 2019, and represents a significant change in how corporations apportion income from services, licensing arrangements, and other intangible-based revenue streams.

Prior Rule for Intangibles and Services (Tax Years Beginning Before January 1, 2020)

For tax years beginning before January 1, 2020, Hawaii used cost-of-performance sourcing for sales other than tangible personal property. Under the prior rule, sales were in Hawaii if: (1) the income-producing activity was performed in Hawaii; or (2) the income-producing activity was performed both in and outside Hawaii and a greater proportion of the income-producing activity was performed in Hawaii than in any other state, based on costs of performance. Corporations with significant service or intangible income may experience materially different apportionment results under the market-based standard.

Practical Impact

The distinction between these rules matters for SALT planning. A software company performing development work in Hawaii but selling licenses nationwide would have sourced that income to Hawaii under the old cost-of-performance rule, but under the market-based rule must trace where the licensed software is actually used. Conversely, a Hawaii-based consulting firm performing services for mainland clients would have included that income in the Hawaii numerator under cost-of-performance but will exclude it under market-based sourcing if the services are used outside Hawaii. The market-based approach requires corporations to develop methodologies for determining where intangibles are "used" and where services are "used or consumed"—factual determinations that can be complex and that Hawaii administrative guidance has not yet fully addressed as of this writing.

Source: Haw. Rev. Stat. § 235-36; Haw. Rev. Stat. § 235-37

Hawaii requires corporations that are members of a unitary group doing business in Hawaii to use combined reporting to determine their Hawaii taxable income. This mandatory combined reporting method applies to tax years beginning after December 31, 1994.

What Is a Unitary Business

A unitary business means a business carried on by a group of entities that includes the taxpayer and where there are flows of value among the entities resulting from: (1) functional integration, (2) centralization of management, or (3) economies of scale. Generally, if the operation of a business within Hawaii is integrated with, is dependent on, or contributes to the operation of the business outside Hawaii, the entire business is unitary in character. The unitary business standard does not require all three factors to be present; any one of the three is sufficient to establish unity.

What Is a Unitary Group

A unitary group means a group of entities carrying on a unitary business, but does not include: (1) any foreign affiliate of a taxpayer in which no part of the foreign affiliate's business income is subject to federal income tax under the Internal Revenue Code, whether or not the foreign affiliate has income effectively connected with the conduct of a trade or business in the United States; or (2) any entity that is not related to the taxpayer within the meaning of Internal Revenue Code section 267(b) and (c) (disallowance of deductions for transactions between related taxpayers).

How the Combined Reporting Method Works

Under the combined reporting method, nonbusiness income is allocated for each entity separately under Hawaii Revised Statutes sections 235-24 to 235-28, as if there were no group. The combined business income of the group is apportioned with reference to the income from, and the property, payroll, and sales factors of, the entire unitary business. The business income attributable to the unitary business of each taxpayer in a group is the combined business income multiplied by the average of the taxpayer's property, payroll, and sales factors (Hawaii's equally weighted three-factor formula).

Importantly, the tax, deductions, credits, and allowances of each member of the group are computed separately. Credits, loss carrybacks, or loss carryovers of a group member cannot be applied against the income or Hawaii tax liability of any other group member because of the combined reporting method.

Filing Requirement: Separate Returns vs. Combined Returns

Each taxpayer in a group must use the combined reporting method to determine its income unless the Department of Taxation permits it to do otherwise. However, each taxpayer in a group must file a separate return reporting its share of the combined business income or loss of the unitary business. This is the default filing method.

A unitary group may elect to file a combined return (a single return for all members) instead of separate returns, but this requires filing an application with the Department, appointing a designated member, and agreeing that all group members are jointly and severally liable for all taxes, penalties, interest, and additions to tax of the group.

Consolidated Returns Are Different and Limited

A combined return is not a consolidated return. A consolidated Hawaii income tax return can only be filed by a group of corporations in which all affiliated members are corporations organized under the laws of Hawaii (domestic corporations). For purposes of the combined reporting rules, a group of domestic corporations electing to file a consolidated return under Hawaii Revised Statutes section 235-92(2) is treated as one taxpayer.

Source: Haw. Admin. Rules §§ 18-235-22-01, 18-235-22-03; Tax Information Release No. 97-2 (Revised)

Hawaii corporate income tax starts with federal taxable income as determined under the Internal Revenue Code but requires several important Hawaii-specific modifications. These modifications adjust both gross income and deductions to arrive at Hawaii taxable income.

Federal IRC Conformity Date

For taxable years beginning after December 31, 2021, Hawaii conforms to the Internal Revenue Code as amended as of December 31, 2021. Hawaii updates its conformity date periodically through legislation, meaning that federal tax changes enacted after the conformity date do not automatically apply for Hawaii purposes unless Hawaii subsequently updates its conformity statute through new legislation. Corporations must track both federal changes and Hawaii's conformity updates when computing Hawaii taxable income.

Key Additions to Federal Taxable Income

State and Municipal Bond Interest. Hawaii Revised Statutes § 235-7(b)(2) requires corporations to include in gross income interest on obligations of any state or political subdivision, unless the interest is expressly exempted or excluded by Hawaii law. This means interest on bonds issued by other states, U.S. territories, counties, or municipalities—which is exempt from federal income tax under IRC § 103—must be added back to federal taxable income for Hawaii purposes. Interest on U.S. government obligations remains excluded from Hawaii gross income because it is income not subject to state taxation under the U.S. Constitution and federal law.

Cost-of-Living Allowances and IRC § 912 Amounts. Hawaii Revised Statutes § 235-7(b)(1) requires inclusion in gross income of cost-of-living allowances and other payments exempted by IRC § 912 (foreign earned income exclusion), unless the amounts are excluded by Hawaii's uniformed-services provisions in § 235-7(a). IRC § 119 (meals and lodging furnished for the convenience of the employer) nevertheless applies for Hawaii purposes.

Key Subtractions and Deduction Disallowances

Dividends-Received Deduction—Federal DRD Disallowed; Hawaii Substitute. Hawaii Revised Statutes § 235-7(c) disallows the federal dividends-received deduction allowed under IRC subchapter B, part VIII (IRC §§ 243–246A). This is one of the most significant corporate modifications. In lieu of the federal DRD, § 235-7(c) allows a deduction for the entire amount of:

• Dividends received by any corporation upon the shares of stock of a national banking association;

• Qualifying dividends (as defined in IRC § 243(b)) received by members of an affiliated group; or

• Dividends received by a small business investment company operating under the Small Business Investment Act of 1958 (Public Law 85-699).

Hawaii also allows a 70% deduction of the amount received by any corporation as dividends:

• Upon the shares of stock of another corporation, if at the date of payment of the dividend at least 95% of the other corporation's capital stock is owned by one or more corporations doing business in Hawaii and the other corporation is subjected to income tax in another jurisdiction (subjection to federal tax alone does not constitute subjection to income tax in another jurisdiction for this purpose); or

• Upon the shares of stock of a bank or insurance company organized and doing business under the laws of Hawaii.

These Hawaii dividends-received deductions are subject to the same limitations that would have applied under IRC § 246(b) and (c) (holding-period and debt-financed-portfolio-stock rules) except that those limitations do not apply to national bank dividends. The statute does not prescribe a 50% or 65% deduction for less-than-20% ownership stakes as federal law does under IRC § 243(a)(1) and (c); instead, the 70% deduction applies to the specifically enumerated categories.

IRC Provisions Not Operative or Modified

Hawaii law specifically provides that certain IRC provisions do not apply or apply only with modifications. Key examples affecting corporations include:

• IRC § 78 (foreign dividend gross-up) is listed in § 235-2.3(b)(2) as not operative for Hawaii purposes;

• IRC § 265 (expenses and interest relating to tax-exempt income) is operative per § 235-2.4(t), except that § 265(b)(3)(G) and (7) are not operative, and § 265 does not apply to expenses for royalties and other income derived from patents, copyrights, and trade secrets by a qualified high technology business as defined in § 235-7.3; and

• Net operating loss rules per § 235-7(d) follow IRC § 172 with Hawaii-specific modifications, including exclusion of NOLs from S corporation years and restrictions on carryback elections.

Practical Effect

The most common Hawaii modifications encountered by multistate corporations are the add-back of state and municipal bond interest and the substitution of the Hawaii dividends-received deduction for the federal DRD. Corporations receiving significant dividend income from subsidiaries or portfolio investments must carefully evaluate whether the Hawaii 70% or 100% deduction applies, which often depends on where the payor is organized, where it does business, and whether it is subject to another state's income tax. The disallowance of the federal DRD means that corporations cannot simply carry over their federal Schedule C calculation; Hawaii requires a separate computation under § 235-7(c). Corporations with intercompany dividends should also confirm that the payor meets the 95% ownership and separate-state-taxation tests for the 70% deduction, as many typical federal 100% DRD situations (e.g., a Hawaii parent owning 100% of an out-of-state subsidiary with no non-federal tax liability) would not qualify for the Hawaii deduction.

Source: Haw. Rev. Stat. § 235-2.3; Haw. Rev. Stat. § 235-2.4; Haw. Rev. Stat. § 235-7

Hawaii corporations must make quarterly estimated tax payments for the current taxable year unless their estimated tax liability (after tax withheld or collected at source) is less than $500. Corporations, including S corporations, estates, and trusts subject to Hawaii income tax under Chapter 235 must annually furnish a declaration of estimated tax and make payments on a quarterly basis.

Installment Due Dates

Corporations operating on a calendar year basis must file estimated tax payment vouchers and make payments on or before April 20, June 20, September 20, and December 20. Taxpayers on a fiscal year basis make similar payments on or before the twentieth day of the fourth, sixth, ninth, and twelfth months of their fiscal year. Hawaii adopts the federal four-installment structure under Internal Revenue Code § 6655 but shifts each due date from the federal 15th of the month to the 20th to conform with Hawaii's corporate return filing deadline (the 20th day of the fourth month following the close of the taxable year, versus the federal 15th day of the third month).

Amount of Each Required Installment

Each of the four required installments must equal 25% of the required annual payment. The required annual payment is the lesser of:

• 100% of the tax shown on the return for the current taxable year (or, if no return is filed, 100% of the tax for such year); or

• 100% of the tax shown on the return of the corporation for the preceding taxable year.

The prior-year safe harbor is not available if the preceding taxable year was not a taxable year of 12 months or if the corporation did not file a return for the preceding taxable year showing a liability for tax. For this purpose, "tax" means the tax imposed under Chapter 235 reduced by any credits available to the taxpayer other than the credit for amounts withheld from wages or taxes withheld at the source, estimated tax payments, or payments remitted with extension requests.

Large Corporation Exception

Hawaii adopts the federal large-corporation limitation in IRC § 6655(d)(2) and (g). A large corporation may not use the prior-year safe harbor except for purposes of determining the amount of the first required installment for any taxable year. Any reduction in the first installment by reason of using the prior-year tax is recaptured by increasing the amount of the next required installment determined under the general rule (100% of current-year tax) by the amount of such reduction.

Foreign Corporation Exemption

The Hawaii Department of Taxation may excuse a foreign corporation from filing an estimate and paying estimated tax if it is satisfied that less than 15% of the corporation's business for the taxable year will be attributable to Hawaii. For this purpose, 15% of a corporation's business is deemed attributable to Hawaii if 15% or more of the corporation's entire gross income (computed without regard to source in Hawaii) is attributable to Hawaii under the apportionment provisions in Haw. Rev. Stat. §§ 235-21 to 235-39. A foreign corporation seeking this exemption must submit a letter requesting exemption to the Department. If, after an exemption is issued, the corporation's business activity in Hawaii (actual or expected) increases such that it no longer qualifies for the exemption, the exemption is automatically terminated.

Penalty for Underpayment

Hawaii imposes a penalty for underpayment of estimated tax equal to 2/3 of 1% per month (or part of a month) on the amount of the underpayment, which equates to an 8% annual rate. The penalty is computed separately for each installment period. Hawaii Revised Statutes § 235-97(f) incorporates the federal underpayment-penalty calculation mechanics in IRC § 6655(d), (e), (g)(2), (g)(3), (g)(4), and (i), with the proviso that due dates in those federal provisions are deemed to be the twentieth day of the applicable month (rather than the federal 15th). Corporations may reduce or eliminate the penalty by using the annualized income installment method or the adjusted seasonal installment method if income varies during the year (for example, due to seasonal operations).

Application of Withholding and Prior-Year Overpayments

Amounts withheld from wages or collected at source are deemed payments of estimated tax and, unless the taxpayer establishes the dates on which amounts were actually withheld or collected, an equal part of such amount is deemed paid on each installment date for the taxable year. If a taxpayer elects to apply a prior-year overpayment to the current year's estimated tax liability, the overpayment may be allocated either to the first estimated tax payment (with any balance allocated to successive quarterly payments until exhausted) or ratably to all estimated tax payments for the current taxable year.

Source: Haw. Rev. Stat. § 235-97; Haw. Admin. Rules § 18-235-97

The Hawaii Department of Taxation has issued limited formal guidance addressing how taxpayers should determine where intangible property is "used" or where services are "used or consumed" under the market-based sourcing rules that became effective for tax years beginning after December 31, 2019.

Tax Information Release No. 2020-01

On January 3, 2020, the Department issued Tax Information Release No. 2020-01, titled "Sales Factor Market Sourcing," which provides the Department's primary administrative guidance on the new market-based sourcing regime. This TIR was released shortly after the market-based sourcing effective date and addresses the transition from cost-of-performance sourcing to market-based sourcing under Act 96, Session Laws of Hawaii 2019.

Scope and Content of Available Guidance

The statute itself provides the general framework: sales of intangible property are in Hawaii "to the extent the intangible property is used in this State," and sales of services are in Hawaii "to the extent the service is used or consumed in this State." Hawaii Revised Statutes § 235-37(b)(1) and (2). However, neither the statute nor the implementing guidance provides detailed attribution methodologies, safe harbors, or specific examples of how to determine "use" or "consumption" for particular types of intangibles or services.

The Department announced Act 96 in Announcement No. 2019-09 (published in 2019) and noted that the change was intended to align the corporate income tax sourcing rules with Hawaii's general excise tax market-based approach and to modernize sourcing for an economy increasingly based on intangibles and remote services. The announcement highlighted the general policy shift but did not provide detailed application guidance.

Absence of Regulations and Detailed Guidance

As of June 1, 2026, Hawaii has not adopted formal administrative rules (regulations) under Title 18, Hawaii Administrative Rules, Chapter 235, specifically addressing the market-based sourcing "used" and "used or consumed" determinations for intangibles and services. The Department has not published taxability matrices, industry-specific examples, or safe-harbor methodologies comparable to guidance issued by some other states that have adopted market-based sourcing.

Practical Implications

In the absence of detailed administrative guidance, Hawaii taxpayers applying market-based sourcing must develop reasonable, supportable methodologies for determining where intangible property is used and where services are used or consumed. Practitioners commonly look to:

• The general excise tax sourcing rules under Hawaii Revised Statutes Chapter 237 and the associated administrative rules, which use a "used or consumed in Hawaii" standard for certain transactions;

• Guidance issued by other market-based sourcing states, recognizing that such guidance is not binding in Hawaii but may provide persuasive frameworks;

• The nature of the transaction, the location of the customer, the location where the benefit of the service or intangible is received, and contractual terms specifying where the intangible or service will be used; and

• Documentation practices that support a reasonable allocation methodology if challenged during audit.

The Department's testimony during the 2019 legislative session indicated that market-based sourcing would enhance uniformity with the general excise tax and reduce administrative burden, but detailed implementing guidance addressing fact-specific "use" determinations has remained limited. Taxpayers with significant service or intangible income sourced under Hawaii's apportionment formula should anticipate that the Department may apply a "use or consumption" standard broadly during audit, particularly where the customer is located in Hawaii or the benefit of the service or intangible is realized in Hawaii.

Source: Tax Information Release No. 2020-01; Haw. Rev. Stat. § 235-37; Announcement No. 2019-09

Hawaii allows corporations to deduct net operating losses (NOLs) through a carryback and carryforward system that follows federal Internal Revenue Code § 172 but with important Hawaii-specific modifications and frozen conformity to a specific federal law version.

Federal IRC § 172 Conformity — Frozen at December 31, 2019

Hawaii Revised Statutes § 235-2.4(n) provides that IRC § 172 "shall be operative for purposes of this chapter in the form that it existed as of December 31, 2019." This means that Hawaii applies the federal NOL rules as they existed on that date and does not automatically conform to subsequent federal changes. The Tax Cuts and Jobs Act (TCJA) had already modified federal NOL rules as of 2019, but the CARES Act's temporary provisions enacted in 2020 (which reinstated five-year carrybacks for certain loss years) do not apply for Hawaii purposes because Hawaii's conformity is frozen at the end of 2019.

Carryback Period — Three Years

Hawaii allows a net operating loss to be carried back to the three taxable years preceding the taxable year of the loss. This differs from the current federal rule under TCJA, which generally eliminated NOL carrybacks for losses arising in taxable years beginning after December 31, 2017 (except for certain farming losses and property and casualty insurance companies). Hawaii's three-year carryback period is established by Hawaii Administrative Rules § 18-235-7-15(c) and is measured from the loss year.

Carryforward Period — Fifteen Years

A net operating loss may be carried forward to the fifteen taxable years following the taxable year of the loss. Hawaii Administrative Rules § 18-235-7-15(d) sets the 15-year carryforward limitation. This is more restrictive than the current federal rule, which allows indefinite carryforwards for losses arising in taxable years beginning after December 31, 2017. Hawaii's 15-year limitation reflects the pre-TCJA federal NOL carryforward period.

Election to Waive Carryback

A taxpayer may elect under IRC § 172(b)(3)(C) to waive the entire carryback period with respect to a net operating loss. When this election is made, the NOL may only be carried forward, not back. Hawaii Revised Statutes § 235-7(d)(3) provides that this federal election is operative for Hawaii purposes, with one important restriction: no taxpayer may make the waiver election for a net operating loss that occurred in the taxpayer's business prior to the taxpayer entering business in Hawaii. Hawaii Administrative Rules § 18-235-7-15(f) further clarifies that the waiver election does not extend the NOL carryforward period beyond fifteen years. The election must be made by attaching a statement to the taxpayer's return (or amended return) for the taxable year of the loss, no later than the due date of the return (including extensions) for that year.

Special Modifications in Computing the NOL

When computing the net operating loss to be carried back or carried over, Hawaii requires the following adjustments beyond federal IRC § 172:

• Municipal bond interest adjustment. Gross income must include the amount of interest excluded from gross income by Haw. Rev. Stat. § 235-7(a) (relating to obligations of the United States and certain other exempt interest), decreased by the amount of interest paid or accrued that is disallowed as a deduction by § 235-7(e) (relating to interest on indebtedness incurred to carry tax-exempt bonds or out-of-state property). Hawaii Administrative Rules § 18-235-7-15(b).

• Only Hawaii-connected deductions allowed. Deductions are allowed only to the extent they are connected with and allocable to income taxable in Hawaii under Haw. Rev. Stat. § 235-5, and IRC § 265 (expenses relating to tax-exempt income) applies as operative under Chapter 235. Hawaii Administrative Rules § 18-235-7-15(e).

Restrictions on S Corporation NOLs

For corporations that have elected or are electing S corporation status under Subchapter S of the IRC as operative under Hawaii law:

• No NOL carryforward or carryback arising for a taxable year in which the corporation is a C corporation may be carried to a taxable year in which the corporation is an S corporation, except as provided in Haw. Rev. Stat. § 235-125.5 (a transition rule for pre-1990 losses).

• No NOL carryforward or carryback arises at the corporate level for a taxable year for which the corporation is an S corporation, per Haw. Rev. Stat. § 235-7(d)(3) and IRC § 1371(b)(2). S corporation NOLs pass through to shareholders.

• However, a taxable year for which the corporation is an S corporation still counts as a taxable year for purposes of measuring the three-year carryback period and the fifteen-year carryforward period. Hawaii Administrative Rules § 18-235-7-15(j).

Limitation on NOLs Allowed

Hawaii Revised Statutes § 235-7(d)(2) provides that no net operating loss carryback or carryover shall be allowed by Hawaii law if it is not allowed under IRC § 172. This means that if the federal NOL deduction would be disallowed under federal law, it is also disallowed for Hawaii purposes, even though Hawaii maintains a different carryback/carryforward structure.

No Carryback to Years Ending Before January 1, 1967

No net operating loss may be carried back to any taxable year ending prior to January 1, 1967. Hawaii Administrative Rules § 18-235-7-15(a).

Combined Reporting — NOLs Remain Separate

Under Hawaii's mandatory combined reporting regime for unitary groups, NOLs are computed and applied separately for each corporation. Credits, loss carrybacks, or loss carryovers of one group member may not be applied against the income or Hawaii tax liability of any other group member merely because the group uses combined reporting. Tax Information Release No. 97-2 (Revised).

Source: Haw. Rev. Stat. § 235-2.4(n); Haw. Rev. Stat. § 235-7(d); Haw. Admin. Rules § 18-235-7-15

Hawaii does not prescribe special mandatory apportionment formulas for specific industries or business types under Chapter 235. Unlike many states that impose alternative formulas for financial institutions, airlines, railroads, telecommunications companies, construction contractors, or other industries, Hawaii applies the standard equally weighted three-factor formula (property, payroll, and sales) to all corporations subject to the corporate income tax, regardless of industry.

Financial Institutions Use Chapter 241, Not Chapter 235

Financial institutions—including banks, building and loan associations, financial corporations, financial services loan companies, small business investment companies, development companies, mortgage loan companies, trust companies, and financial holding companies—are not subject to the Chapter 235 corporate income tax. Instead, these entities pay a franchise tax under Hawaii Revised Statutes Chapter 241, measured by their entire net income at a rate of 7.92%. Chapter 241 is imposed in lieu of both the corporate income tax and the general excise tax for financial institutions.

When financial institutions subject to Chapter 241 apportion income from multistate operations, they use the same Uniform Division of Income for Tax Purposes Act (UDITPA) three-factor formula prescribed in Hawaii Revised Statutes §§ 235-21 to 235-39. Hawaii Administrative Rules § 18-241-4-01(a) provides that "any financial institution having income from business activity which is taxable both within and without this State shall allocate and apportion its net income by the use of the apportionment of business income allocation provisions of the Uniform Division of Income for Tax Purposes Act" in Part II of Chapter 235. The formula remains the equally weighted property, payroll, and sales factors; Chapter 241 does not prescribe a receipts-weighted or single-factor formula for financial institutions as some other states do.

No Special Formulas for Transportation, Telecommunications, or Other Industries

Hawaii has not enacted special apportionment formulas for airlines, railroads, trucking companies, telecommunications providers, broadcasting companies, construction contractors, or publishing companies. All corporations doing business both within and outside Hawaii and subject to Chapter 235 apportion their business income using the three-factor formula in Hawaii Revised Statutes § 235-29, regardless of their industry classification.

Equitable Adjustment Relief Under HRS § 235-38

Although Hawaii does not mandate industry-specific formulas, the state does provide a safety valve for taxpayers or the Department of Taxation when the standard formula does not fairly represent the extent of a taxpayer's business activity in Hawaii. Hawaii Revised Statutes § 235-38 authorizes the taxpayer to petition for, or the director of taxation to require, an alternative apportionment method if the allocation and apportionment provisions of Part II "do not fairly represent the extent of the taxpayer's business activity in this State."

Under § 235-38, the following adjustments are permitted if reasonable:

• The exclusion of one or more of the factors (property, payroll, or sales);

• The inclusion of one or more additional factors that will fairly represent the taxpayer's business activity in Hawaii; or

• The employment of any other method to effectuate an equitable allocation and apportionment of the taxpayer's income.

This equitable adjustment provision is discretionary and fact-specific. It does not create a presumptive alternative formula for any industry; rather, it allows tailored relief when the statutory formula produces a distortive result for a particular taxpayer's operations. The burden is on the taxpayer to demonstrate that the standard apportionment does not fairly represent its Hawaii business activity, or the Department may initiate the adjustment if it determines the standard formula overstates or understates Hawaii-source income.

Practitioners representing multistate corporations in industries that receive special apportionment treatment in other states—such as air carriers, railroads, or telecommunications companies—should not assume Hawaii offers comparable industry-specific rules. Hawaii's approach is to apply the uniform three-factor formula broadly and to address distortions on a case-by-case basis through the equitable adjustment mechanism in § 235-38.

Source: Haw. Rev. Stat. § 235-29; Haw. Rev. Stat. § 235-38; Haw. Admin. Rules § 18-241-4-01