[LUAU] QHTB

Stan Baptista sbaptista at yahoo.com
Tue Nov 21 11:31:05 PST 2006


> Is there any 
> even a slimmest possibility?  Thanks.

IMHO, more than a slim possiblity. F/OSS _itself_ is not particularly a factor. Activity that may qualify under Act 221/215 certainly can include F/OSS. The more important issue is whether the business utilizing these technologies is considered a QHTB as defined by the statute.

I will also point out that you can receive a "comfort letter" ruling from the tax department ($1K fee) that can provide initial guidance on whether that department would consider a company to be a QHTB.

>From what I know, you need to be able to or have the potential to export
a 'product' to qualify...

Export a product?? Not sure what this means.


BACKGROUND 

There are two basic types of credits: investment (non-refundable) and research (refundable). Non-refundable means that the credit may be applied only to the tax liablity of a taxpayer for a given year. For example, if the credit says you're entitled to $10,000 but your liablity is $9,000, you can write off only the $9,000. However, for a refundable credit, the state will "refund" the difference. In this example, you would receive a check from the state for $1,000.


INVESTMENT CREDIT 

Without getting into too much detail, to qualify for the investment credit, investors must invest in a QHTB (Qualified High Technology Business), which is defined as follows:



"Qualified high technology business" means a business, employing or
owning capital or property, or maintaining an office, in this State;
provided that:



(1) More than fifty per cent of [whose] its total business activities
are qualified research; and provided further that the business conducts
more than seventy-five per cent of its qualified research in this
State; or



(2) More than seventy-five per cent of its gross income is derived from
qualified research; and provided further that [the] this income is
received from:



    (A) Products sold from, manufactured in, or produced in this State; or



    (B) Services performed in this State.




QUALIFIED RESEARCH


(1) above states that business activities must be "qualified research". There are eight types of activities that constitute qualified research. The
two that are most germane to this discussion are probably:

1. A company that performs research as defined by IRC (Internal Revenue Code) section 41(d). Both software and hardware activity may quailfy and there is no particular reason why the development of F/OSS products/technologies would be excluded.

2. A company that develops and designs computer software for ultimate commercial sale, lease, license or to be otherwise marketed, for economic consideration. With respect to the software's development and design, the business has substantial control and retains substantial rights to the resulting intellectual property.

The additional research types are these:

3. Biotechnology.
4. Performing arts.
5. Sensor and optic technologies.
6. Ocean sciences.
7. Astronomy.
8. Nonfossil fuel energy-related technology.


RESEARCH CREDIT

The research credit, as mentioned, is refundable and is among the most generous credits of its type in the nation. To be eligible 
for this credit, more than 50% of the activity claimed as qualified 
research must be performed in the state of Hawaii.

The research credit has actually already been mentioned above. To qualify for the research credit, activity must satisfy the criteria of research as defined by IRC section 41(d).

For more details here are some links:

http://www.hawaii.gov/tax/a2_b2_6hi_tech.htm

http://www.webawocky.com/act221/ (my web site, which I use as a resource. Unitl recently, I functioned as the subject matter expert (software) for the tax department in audit cases related to Act 221/215.) NOTE, HOWEVER, THAT THE CONTENTS ARE NOT INTERPRETATIONS IN ANY WAY OF THE TAX DEPARTMENT.

hth,
-Stan






 
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