Hawaii Film Blog

Tuesday, November 15, 2005

Act 221 Fees & Comfort Rulings Demystified

On Friday, Pacific Business News published a second article about the new fees for administering high-tech tax credits. This time, PBN's Clynton Namuo listed specific fee amounts, such as what the Tax Department will charge for issuing comfort rulings confirming the eligibility of investors and entities for various high-tech tax credits, including the investment tax credit commonly known as "Act 221" but properly known as Section 235-110.9, HRS, the income tax exclusions for royalties (235-7.3, HRS) and for stock options and dividends (235-9.5, HRS), and the research tax credit (235-110.91, HRS). The article also listed the fees required for certifying the credit amounts themselves.

Namuo seemed to imply that a comfort ruling is a prerequisite for claiming the Act 221 high-tech investment tax credit in particular, saying, "tax credits are essentially useless without the rulings because few investors will put money into a company without first getting a guarantee that they will qualify for the tax credits." This statement is slightly off. Actually, tax credits are not "essentially useless" without a comfort ruling, because a comfort ruling is not required for claiming tax credits. Rather, the purpose of such a ruling is quite simply to give comfort to a company's investors that they would qualify for the credits based on the answers the company or its investors furnish themselves to the Tax Department in the comfort ruling request. When income tax time rolls around and someone claims high-tech tax credits, this claim, like any other claim on a tax return, is subject to audit.

That said, any investor who still wants the peace of mind provided by a comfort ruling prior to making her investment (or any company that wants to give its potential investors peace of mind) needs to pony up $1,000 for a comfort ruling--no exceptions. That is, even if you run a tiny indie film company operating on an annual investment of $20,000 per year, it would cost you $1,000 (just once) to get a comfort ruling saying that your company is a qualified high-tech business (QHTB) whose investors are eligible for Act 221 investment tax credits. But again, you don't absolutely need one for your investors to be able to claim those credits--just make sure you have the back-up paperwork that proves you are indeed a QHTB in case of audit, and be sure your investors file the appropriate tax forms (such as Form N-318A to certify the credits).

Unlike comfort rulings, credit certifications are required to claim the high-tech tax credits. And there are fees attached to these:

  • Investment Credit Certification, Individual Investor (Form N-318A): $100, or $150 after the 3rd Wed in January following the year the investment was made
  • Investment Credit Certification, Pass-Through Entity (on behalf of partners, shareholders, etc.) (Form N-318A) : $750, or $1,000 after the 3rd Wed in January following the year the investment was made
  • Research Credit Certification (Form N-319A): $400, or $750 after the 3rd Wed in January following the year in which the research expenses were incurred
However, the above fees only apply to investment and research credit amounts that are $25,000 and over. If an individual investor or pass-through entity claims $24,999.99 or less in investment or research tax credits, certification is free.

Please note that I'm no tax lawyer or accountant (sorry, Mom), nor do I work in the Tax Department, so please read the above as general information only and perform your own due diligence prior to making any business decisions (read my disclaimer on the right). The official fee announcement from the Tax Dept. is linked below, so click on it to get the info straight from the horse's mouth. You should also check out the Tax Dept's section on high-tech tax incentives (get ready for some thrilling--but highly informative--reading).

>> Hawaii Department of Taxation Announcement No. 2005-19
State begins charging fees to tech tax credit applicants [PBN, 11/11/05]

>> Act 221 Fees
Tech Comm'ty: Don't Denigrate Act 221
>> Act 221 = $108M So Far
>> Numerology: 221, 215, 235-110.9

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