Haw. Code R. § 18-235-110.7-15

Current through September, 2024

Section 18-235-110.7-15 - Recapture event (i.e., property ceases to be eligible property)

(a) In general.

Property ceases to be eligible property with respect to a taxpayer:

(1) As a result of the occurrence of an event on a specific date (e.g., a sale, transfer, retirement, gift, distribution, or other disposition). The cessation shall be treated as having occurred on the actual date of the event; or

(2) For any reason other than the occurrence of an event on a specific date (e.g., the property is used predominantly in connection with the furnishing of lodging during the taxable year and does not fall within one of the exceptions; decrease in business use of listed property). The cessation shall be treated as having occurred on the first day of the taxable year.

(b) Decrease in the business use of listed property to less than fifty percent. During the recapture period, all or a portion of the credit taken in an earlier year for listed property may be subject to recapture if:

(1) the percentage of business use falls below the percentage of business use for the year the listed property was placed in service; or

(2) the listed property is converted from business use to personal use and does not satisfy the more-than-fifty percent business use test. The terms "listed property" and "the more-than-fifty percent business use test" are defined in section 18-235-110.7-11(j).

(c) Example. Subsection (b) is illustrated as follows:

A, a calendar-year taxpayer, places in service on January 15, 1988, listed property (i.e., automobile) for $7,000. In 1988, A uses the automobile 75 percent for business, 15 percent for the production of income, and 10 percent for personal use. For taxable year 1988, A claims a credit in the amount of $189 ($7,000 x 90% x 3%). In 1989, A uses the automobile 60 percent for business, 15 percent for the production of income, and 25 percent for personal use. The increased personal use triggers partial recapture of the credit of $20.79 [[($7,000 x 90% x 3%) -($ 7,000 x 75% x 3%)] x 66%]. In 1990, A uses the automobile 50 percent for business, 25 percent for the production of income, and 25 percent for personal use. Although recapture is not required on the basis that the percentage of personal use remains the same in taxable years 1989 and 1990, I.R.C. §280F, which is adopted by section 235-110.7(d), HRS, requires recapture because the automobile ceases to be eligible property for failure to satisfy the more-than-50 percent business use test. Accordingly, A must recapture a further $51.98 [[($7,000 x 75% x 3%) -($7,000 x 0% x 3%)] x 33%].

(d) Decrease in basis of eligible property. During the recapture period, all or a portion of previously taken credit may be subject to recapture as a result of a cessation such as a decrease in the basis of eligible property (either through a refund in purchase price or usage of the property for personal purposes).

(e) Example. Subsection (d) is illustrated as follows:

A, a calendar-year taxpayer, places in service on January 1, 1988, property, which is not listed property, with a basis of $20,000. In taxable year 1988, A uses the property 80 percent for business, and 20 percent for personal purposes. Thus, for taxable year 1988, only 80 percent, or $16,000 ($20,000 x 80%) of the basis of the asset qualifies as eligible property. The credit allowable in 1988 is $480 ($16,000 x 3%). In taxable year 1989, A uses the asset 60 percent for business, and 40 percent for personal purposes. The increased personal use triggers partial recapture of the credit in taxable year 1989 of $79.20 [[($20,000 x 80% x 3%) - ($20,000 x 60% x 3%)] x 66%].

(f) Partnership, S corporation, estate, or trust.

(1) In general. In the case of a partnership, S corporation, estate, or trust, the recapture rule applies to a partner, shareholder, or beneficiary who originally received the benefit of a credit if within the recapture period:

(A) the S corporation, partnership, estate, or trust disposes of eligible property (or if eligible property otherwise ceases to be eligible property in the hands of the entity); or

(B) the partner's, shareholder's, or beneficiary's interest in the entity is reduced (for example, by a sale of the partner's, shareholder's, or beneficiary's interest in the entity) below a specified percentage. See section 18-235-110.7-16 for exceptions to the recapture rule for transfers by reason of death of a partner, and a downward basis adjustment pursuant to I.R.C. §754 (regarding manner of electing optional adjustment to basis of partnership property).

(2) "Specified percentage", defined. The term specified percentage is defined by the following two rules:

(A) 66 2/3 percent rule; and

(B) 33 1/3 percent rule.

(3) "66 2/3 percent rule", defined. The 66 2/3 percent rule means that if a partner's, shareholder's, or beneficiary's interest in the entity is reduced below 66 2/3 percent of its interest at the time the credit was taken, a pro rata share of the partner's, shareholder's, or beneficiary's interest in the entity's eligible property will cease to be eligible property with respect to the partner, shareholder, or beneficiary, and credit recapture will be required.

(4) "33 1/3 percent rule", defined. The 33 1/3 percent rule means that once there has been a recapture by reason of the 66 2/3 percent rule, there is no further recapture until the partner's, shareholder's, or beneficiary's interest is reduced to less than 33 1/3 percent of its interest at the time the credit was taken. Thereafter, any reduction in interest, however small, will again subject the partner, shareholder, or beneficiary to the recapture provisions.

(5) Prior recapture determination. In making a recapture determination, there should be taken into account any prior recapture determination made with respect to the partner, shareholder, or beneficiary in connection with the same property.

(6) Example. Paragraphs (1) to (5) are illustrated as follows:

Example 1. General Facts. Corporation S, a calendar year S corporation, places in service on June 1, 1988, the following three items of eligible property:

Asset number	Basis
1...........................	$30,000
2...........................	$30,000
3...........................	$30,000

On December 31, 1988, Corporation S has 200 shares of stock outstanding which are owned equally by shareholders A and B, calendar year taxpayers. The total basis of the three eligible properties are apportioned to shareholders A and B as follows:

Total basis .........................	$90,000
Shareholder A (100/200) ..	$45,000
Shareholder B (100/200) ..	$45,000

In taxable year 1988, each shareholder takes a credit of $450 ($15,000 x 3%) for each of the three eligible properties, or a total credit of $1,350 ($15,000 x 3% x 3).

Example 2. Assume the facts as in Example 1 and the following fact. On December 21, 1989, Corporation S sells asset No. 3 to Corporation X. For taxable year 1989, shareholders A and B must each recapture $297 ($450 x 66%) of their previously taken credit. Corporation X will not be subject to recapture because it never benefited from the credit.

Example 3. Assume the facts as in Example 1 and the following fact. On November 11, 1990, shareholder A sells 50 of A's 100 shares to C. As a result, 50 percent of A's share of the basis of each of the three eligible properties cease to be eligible properties with respect to A since immediately after the sale, A's proportionate interest in Corporation S is reduced to 50 percent of A's interest at the time the credit was taken. For taxable year 1990, A must recapture $222.75 ($1,350 x 50% x 33%).

Example 4. Assume the facts as in Examples 1 and 3, and the following fact. On September 1, 1991, shareholder A disposes of 10 more shares to E, leaving A with 40 of A 's original 100 shares. The sale in 1991 does not trigger recapture for A because of the 33 1/3 percent rule-since A was subject to recapture by reason of a reduction in interest below 66 2/3 percent (i.e., 50 percent) in 1990, A experiences no further recapture until A's interest is reduced to less than 33 1/3 percent of A's original interest. The sale in 1991 reduces A's interest to only 40 percent. E will not be subject to recapture.

Example 5. Assume the facts as in Example 1 and the following fact. On November 11, 1990, shareholder A sells 15 of A's 100 shares to D. The sale does not trigger recapture for A because of the 66 2/3 percent rule-A's interest in Corporation S has not been reduced below 66 2/3 percent of A's interest at the time the credit was taken. This result occurs despite the fact that A now owns only 85 percent of A's original stock interest. D will not be subject to recapture.

(7) S corporation election.

(A) In general. If a C corporation makes a valid election under section 235-2.4, HRS, to be an S corporation, then on the last day of the taxable year immediately preceding the first taxable year for which the election is effective, any eligible property the basis of which was taken into account to compute the C corporation's credit allowable in taxable years prior to the first taxable year for which the election is effective (and which has not been disposed of or otherwise ceased to be eligible property with respect to the C corporation prior to such last day) shall be considered as having ceased to be eligible property with respect to the C corporation and the recapture rule shall apply. However, the recapture rule shall not apply if the S corporation and each of its shareholders on the first day of the first taxable year for which the election under section 235-2.4, HRS, is to be effective, or on the date of the election, whichever is later, execute an agreement as is described in subparagraph (B).

(B) "Agreement", defined. The agreement shall:

(i) be signed by the shareholders; and on behalf of the S corporation by a person who is duly authorized;

(ii) state that if eligible property for which the credit was taken is later disposed of by, or ceases to be eligible property with respect to the S corporation during the recapture period and during a taxable year for which the S election is effective, each signer agrees to notify the director of a disposition or cessation; and to be jointly and severally liable to pay the director an amount equal to the increase in tax provided by the recapture rule;

(iii) state the name, address, and taxpayer identification number (e.g., social security number) of each party to the agreement;

(iv) be filed with the department for the taxable year immediately preceding the first taxable year for which the S election is effective; and

(v) be filed with the department on or before the due date (including extensions of time) of the return, unless the director permits, upon a showing of good cause, that the agreement may be filed on a later date.

(C) Shareholder's share of the amount of credit recapture. A shareholder's share of the amount of credit recapture shall be determined as if the property had ceased to be eligible property as of the last day of the taxable year immediately preceding the first taxable year for which the S election is effective; however, the recapture percentage shall be determined as if the property ceased to be eligible property on the date the property actually ceased to be eligible property.

(g) Transfer of eligible property out of Hawaii. During the recapture period, all or a portion of previously taken credit will be subject to recapture if the eligible property is transferred out of the State of Hawaii.

(h) Example. Subsection (g) is illustrated as follows:

X, a calendar-year taxpayer, places eligible property in service on September 1, 1988. The property has a basis of $10,000 and is used entirely for business purposes. X claims the credit on its 1988 tax return. On June 1, 1989, X transfers the eligible property out-of-state to another section of its business operation. The transfer of property out-of-state triggers recapture of the credit in taxable year 1989 of $300 [(10,000 x 3%) x 100%].

Haw. Code R. § 18-235-110.7-15

[Eff 1/18/90] (Auth: HRS §§ 231-3(9), 235-118) (Imp: HRS § 235-110.7)