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Tax Insights
from State and Local Tax Services
Hawaii – proposed legislation would
remove dividends paid deduction for
real estate investment trusts
February 17, 2015
In brief
On January 22, 2015, S.B. 118 was introduced in the Hawaii Senate to remove the dividends paid
deduction for REITs in the state. S.B. 118 was referred to the Senate Ways and means Committee, and
has been scheduled for a public hearing on February 18, 2015. The proposal could significantly increase
the corporate income tax burden of REITs in the state.
A similar bill, H.B. 82, was also introduced in the Hawaii House of Representatives, however, on
February 4, 2015, this bill was deferred by the Committee on Consumer Protection &
Commerce/Committee on Judiciary and no further action is expected.
In detail
Background
REITs are appealing to many
investors as they are exempt
from federal corporate income
tax as long as they pass on the
income to their shareholders,
through dividends. The
shareholders then pay income
tax on the dividends in the state
or country where they are
resident of or commercially
domiciled, not where the
property is located. Hawaii has
nearly 300 REIT-owned
properties, many of which have
numerous shareholders that live
throughout the US and
internationally.
Dividends paid deduction to
be eliminated
For federal income tax
purposes, REITs are taxed
under sections 857 and 858 of
the Internal Revenue Code,
which provide for a dividends
paid deduction (DPD) for
qualifying REITs. Under
Hawaii Rev. Stat. sec. 235-71(d),
Hawaii specifically adopts IRC
sections 857 and 858, thereby
providing the same dividends
paid deduction at the state level
for corporate income tax
purposes. These federal and
state deductions allow REITs to
significantly decrease their
taxable income and, therefore,
the two levels of taxes for
investors, once at the corporate
level and again at the
shareholder’s level.
S.B. 118 would eliminate the
DPD and specifically provides,
“for taxable years beginning
before January 1, 2016, the
deduction for dividends paid is
limited to such amount of
dividends as attributable to
taxable income, for taxable
years beginning after December
31, 2015, no deduction for
dividends paid shall be
allowed.” The state believes that
because most of these REITs are
widely held and not often by
Hawaii investors, the benefits of
REITs investing in their state is
not significant and costs the
state more money in the long
run. It appears that the state
legislature may not have
considered the impact of the
overall investments REITs
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provide in the state in terms of
development and jobs created by
these companies.
The takeaway
The proposed legislation has
substantial impact on REITs and their
shareholders as well as limits the
future investments by REITs in the
state. Upon approval, a REIT's tax
liability may significantly increase
with the removal the dividends paid
deduction. REITs and investors
should be aware of this impact and
possible changes in their future
income tax liabilities or dividends
from REITs with investments in
Hawaii.
Let’s talk
For more information on the proposed Hawaii legislation or the state taxation of REITs or their investor, in general please
contact:
State and Local Tax Services—Real Estate
Sean Richman Kanousis
Principal, New York
+1 (646) 471-4858
sean.richman.kanousis@us.pwc.com
Sam Melehani
Partner, Los Angeles
+1 (213) 356-6900
sam.melehani@us.pwc.com
State and Local Tax Services—Asset Management
Brian Rebhun
Principal, New York
+1 (646) 471-4024
brian.rebhun@us.pwc.com
Bruce Graber
Partner, New York
+1 (646) 471-1447
bruce.graber@us.pwc.com
Jon Muroff
Partner, Boston
+1 (617) 530-4573
jon.muroff@us.pwc.com
Ken Turner
Principal, Chicago
+1 (219) 741-2144
kenneth.turner@us.pwc.com
Steve Arluna
Partner, McLean
+1 (703) 918-1521
steve.arluna@us.pwc.com
Kevin McMillen
Partner, Dallas
+1 (214) 754-7913
kevin.mcmillen@us.pwc.com
Paul Estrada
Principal, Houston
+1 (713) 356-8023
kevin.mcmillen@us.pwc.com
Eran Liron
Partner, San Jose
+1 (408) 817-3937
eran.j.liron@us.pwc.com
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