PDF document

- 1 -

STATE OF HAWAII — DEPARTMENT OF TAXATION

Shareholder’s Instructions
2023
for Schedule K-1 (Form N-35)
Shareholder’s Share of Income, Credits, Deductions, etc.
(For Shareholder’s Use Only)
(Section references are to the Internal Revenue Code (IRC), unless otherwise noted.)

General Instructions dent Hawaii net income tax return (Form N-15) subse- Income
Basis in Corporate Stock.—You are responsible for quently filed by the shareholder or may take the place Line 1. Ordinary income (loss) from trade or busi-
maintaining records to show the computation of your of filing a Hawaii return by the nonresident sharehold- ness activities.—The amount reported on line 1 is
basis in stock of the corporation. Schedule K-1 pro- er. No credit will be allowed for this amount until the S your share of the ordinary income (loss) from trade
vides you with information to help you make the com- corporation has filed and paid the amount due. Share- or business activities of the corporation. Generally,
putation at the end of each corporation tax year. holders for whom an agreement is obtained and filed where you report the amount depends on whether
as required may be included in a composite net in- the amount is from an activity that is a passive activ-
The initial basis of a resident shareholder in the come tax return filed on behalf of an S corporation’s ity to you. Refer to the federal Shareholder’s Instruc-
stock of an S corporation and in any indebtedness of nonresident shareholders. tions for Schedule K-1 (Form 1120S) for the amount
the corporation owed to the shareholder shall be de-
termined in the manner provided under the IRC. The Errors.—If you believe the corporation has made an to report. Include this amount on Form N-15, line 17.
initial basis shall be determined as of the last to occur error on your Schedule K-1, notify the corporation Line 2. Net income (loss) from rental real estate
of the following: and ask for a corrected Schedule K-1. Do not change activities.—Generally, the income (loss) reported on
any items on your copy. Be sure that the corporation line 2 is a passive activity amount for all sharehold-
1. The shareholder last became a resident of Ha- sends a copy of the corrected Schedule K-1 to the ers. If there are exceptions, then refer to the feder-
waii; Hawaii Department of Taxation. al Shareholder’s Instructions for Schedule K-1 (Form
2. The shareholder acquired the stock or the in-
debtedness of the corporation; or Specific Instructions 1120S). Include the amount on Form N-15, line 17.
3. The corporation became an S corporation. Name, Mailing Address, and Identifying Num- Line 3. Net income (loss) from other rental ac-
The initial basis of a resident shareholder in the stock ber.—Your name, mailing address, and identifying tivities.—The amount on line 3 is a passive activity
and indebtedness of an S corporation shall be adjust- number, the corporation’s name, address, and iden- amount for all shareholders. Report a loss following
ed after the above date in the manner and to the ex- tifying number, and item A should have been entered. the instructions for federal Form 8582. Report income
tent required by section 1011 except that, with respect The corporation completes item B, if applicable. on Form N-15, line 17.
to any taxable period during which the sharehold- Lines 1 through 29 Line 4. Interest.—Include the amount in the Interest
er was a resident of Hawaii, any modification made If you are an individual shareholder, take the amounts Worksheet in the Form N-15 Instructions.
(other than for income exempt from federal or State shown in column (b) and the total sum of amounts Line 5. Ordinary Dividends.—Include the amount
taxation) to the shareholder’s income from the S cor- shown in columns (b) and (c) and enter them on the on line 9 of Form N-15.
poration shall be taken into account; and any adjust- appropriate worksheet and/or lines of your tax return. Line 6. Royalties.—Include the amount on Form
ments made pursuant to section 1367 for a taxable If you are an estate or trust, report the amounts shown N-15, line 17.
period during which Hawaii did not measure S corpo- in columns (b) and/or (c) as instructed on Form N-40, Line 7. Net short-term capital gain (loss).—Include
ration shareholder income by reference to the corpo- Hawaii Fiduciary Income Tax Return. the amount in the Capital Gain/Loss Worksheet in the
ration’s income shall not be taken into account. The The amounts on lines 1 through 29 show your pro Form N-15 Instructions.
basis of a resident shareholder in the stock of an S rata share of ordinary income, loss, deductions, cred- Line 8. Net long-term capital gain (loss).—Include
corporation shall be reduced by the amount allowed its, and other information from all corporate activities. the amount in the Capital Gain/Loss Worksheet in the
as a loss or deduction, not to exceed the combined These amounts do not take into account limitations on Form N-15 Instructions.
adjusted basis of the shareholder in the stock and in- losses or other items that may have to be adjusted be- Line 9. Net section 1231 gain (loss).—Section 1231
debtedness of the corporation. cause of your adjusted basis in stock and debt in the gain or loss is reported on line 9. The corporation will
The initial basis of a nonresident shareholder in corporation, the at-risk limitations under section 465, identify the activity to which the section 1231 gain
the stock of an S corporation and in any indebtedness the passive activity limitations of section 469, or any (loss) relates in the line 30 Supplemental Information
of the corporation to the shareholder shall be zero. other limitations that must be taken into account at section of Schedule K-1. If the amount on line 9 is
The initial basis shall be determined as of the last to the shareholder level in figuring taxable income (e.g., from a rental activity, the section 1231 gain (loss) is
occur of the following: the section 179 expense limitation (further limited for a passive activity amount. Likewise, if the amount re-
1. The shareholder acquired the stock or indebt- Hawaii purposes to $25,000)). These limitations are lates to a trade or business activity and you did not
edness of the corporation; discussed in the instructions for federal Schedule K-1 materially participate in the activity, the section 1231
2. The corporation became an S corporation; or (Form 1120S). If you are an individual shareholder gain (loss) is a passive activity amount. Refer to the
3. The shareholder last became a nonresident of and your share of pro rata items are affected by any federal Shareholder’s Instructions for Schedule K-1
Hawaii. limitations, adjust the amounts before you enter the (Form 1120S) for applicable amount to report. Include
amounts on your return.
The initial basis of a nonresident shareholder in the applicable gain or loss on Schedule D-1, line 2.
the stock and indebtedness of an S corporation shall Caution: If you have losses, deductions, credits, etc., Line 10. Other income (loss).—Amounts on line 10
be adjusted after the above date in the manner pro- from a prior year that were not deductible or use- are other items of income, gain, or loss not included
vided in section 1367, except that adjustments to ba- able because of certain limitations, such as the at-risk on lines 1 through 9. The corporation should give you
sis shall be limited to the income attributable to Hawaii rules, they may be taken into account in determining a description and the amount of your share for each
and taxable to the nonresident shareholder for Hawaii your income, loss, etc., for this year. However, do not of these items. Include the amount of income (loss) on
income tax purposes. In computing income attribut- combine the prior year amounts with any amounts the applicable line of your return. Refer to the feder-
able to Hawaii, any modification made for income ex- shown on this Schedule K-1 to get a net figure to re- al Shareholder’s Instructions for Schedule K-1 (Form
empt from federal or Hawaii taxation shall be taken port on your return. Instead, report the amounts on 1120S) for more information.
into account. your return on a year-by-year basis.
Deductions
Nonresident Shareholders.—Shareholders who Line-by-Line Instructions Line 11. Charitable contributions.—The corpora-
are not Hawaii residents will be asked by the S cor- For Form N-11 filers, most of your pro rata share of tion will give you a schedule that shows the amount
poration to complete and sign an agreement (Sched- ordinary income, loss, deductions, etc. are included in of contributions subject to the 50%, 30%, and 20%
ule NS) stating that the shareholder agrees to file a federal adjusted gross income (federal AGI). If the to- limitations. Refer to the federal Shareholder’s Instruc-
Hawaii net income tax return, make timely payments tal sum of the amounts in columns (b) and (c) of your tions for Schedule K-1 (Form 1120S) for the amount
of taxes due, and to be subject to personal jurisdic- Hawaii Schedule K-1 (Form N-35) and the amounts in to report. Include the amount in the Worksheet A-4 -
tion in the State of Hawaii for purposes of the collec- your federal Schedule K-1 (Form 1120S) are different, Gifts to Charity in the Form N-11 Instructions or Work-
tion of unpaid income tax. Shareholders for whom an make the necessary adjustments in the Hawaii Ad- sheet PY-4 or NR-4 in the Form N-15 Instructions.
agreement is not obtained and filed by the S corpora- ditions Worksheet and/or Hawaii Subtractions Work- Line 12. IRC section 179 expense deduction.— In-
tion on its timely filed return are subject to withhold- sheet of the Form N-11 Instructions. clude this amount along with the total cost of section
ing by the S corporation of 11% of the shareholder’s 179 property placed in service during the year from
income attributed to Hawaii. This amount, shown on other sources, to complete federal Form 4562, De-
line 16o, may be claimed as a credit on a nonresi- preciation and Amortization. If the amount is alloca-

- 2 -

Enlarge image

Shareholder’s Instructions for Schedule K-1 (Form N-35)
(Rev. 2023) Page 2
ble to a passive activity from the corporation, report to the Hawaii net income tax return you file in order to the shareholder in an amount equal to the sharehold-
the amount following the instructions for federal Form receive the credit. Figure your credit on Form N-756 er’s pro rata share of any net income tax paid by the S
8582. If the amount is not a passive activity deduction, and attach Schedule K-1 to your return. Corporation to a state which does not measure the in-
include it on Form N-15, line 17. The maximum Ha- Line 16d. Hawaii Low-Income Housing Tax Cred- come of S corporation shareholders by the income of
waii deduction is $25,000. it.—Hawaii’s low-income housing tax credit is equal to the S corporation. Include amount in Other State and
Line 13. Deductions related to portfolio income 50% (30% for property placed in service prior to July Foreign Tax Credit Worksheet in the Forms N-11 In-
(loss).—Amounts on line 13 are the expenses (oth- 1, 2005) of the federal credit for qualified buildings structions or in the Form N-15 Instructions and attach
er than investment interest expense and section 212 located in the State of Hawaii. Figure your credit on Schedule K-1 to your return.
expenses from a REMIC) paid or incurred to produce Form N-586 and attach Schedule K-1 to your return. Other
portfolio income. Generally, include the amounts in Note: You may apply this nonrefundable credit only Line 17. Property distributions.—Reduce the basis
the Worksheet A-6 - Miscellaneous Deductions in the after all other credits except the carryover of the High of your stock in the corporation by the distributions on
Form N-11 Instructions or Worksheet PY-6 or NR-6 Technology Investment Tax Credit have been applied line 17. If these distributions exceed the basis of your
in the Form N-15 Instructions. These deductions are against your Hawaii income tax liability. stock, the excess is treated as gain from the sale or
not taken into account in figuring your passive activi- Line 16e. Credit for Employment of Vocational Re- exchange of property and is reported in the Capital
ty loss for the year. habilitation Referrals.—Your share of the Credit for Gain/Loss Worksheet in the Form N-15 Instructions.
Line 14. Other deductions.—Amounts on line 14 Employment of Vocational Rehabilitation Referrals is Line 18. Tax exempt interest income.—Generally,
are other deductions not included on lines 11, 12, and shown on line 16e. Refer to Form N-884 for further in- you must increase the basis of your stock in the cor-
13. The corporation should give you a description and formation. Figure your credit on Form N-884 and at- poration by the amount shown.
your share of each of the expense items. Include the tach Schedule K-1 to your return. Line 19. Other tax exempt income.—Generally, you
amount of deduction on the applicable line of your re- Line 16f. Qualified production costs for the Mo- must increase the basis of your stock in the corpora-
turn. Refer to the federal Shareholder’s Instructions tion Picture, Digital Media and Film Production tion by the amount shown.
for Schedule K-1 (Form 1120S) for more information. Income Tax Credit.—Your share of the Qualified Line 20. Nondeductible expenses.—The nonde-
Investment Interest Production Costs for the Motion Picture, Digital Me- ductible expenses paid or incurred by the corporation
If the corporation paid or accrued interest on debts dia and Film Production Income Tax Credit is shown are not deductible on your tax return. Generally, you
properly allocable to investment property, the amount on line 16f. Figure your credit on Form N-340 and at- must decrease the basis of your stock in the corpora-
of interest you are allowed to deduct may be limit- tach Schedule K-1 to your return. tion by this amount.
ed. For more information and the special provisions Line 16g. Credit for School Repair and Mainte- Line 21. Amount of loan repayments for “Loans
that apply to investment interest expense, see Form nance.—Your share of the Credit for School Repair from Shareholders.”—If the line 21 payments are
N-158, Investment Interest Expense Deduction, and and Maintenance is shown on line 16g. Figure your made on indebtedness with a reduced basis, the re-
federal Publication 550, Investment Income and Ex- credit on Form N-330 and attach Schedule K-1 to payments result in income to you to the extent the re-
penses. your return. payments are more than the adjusted basis of the
Line 15a. Interest expense on investment debts.— Line 16h. Renewable Energy Technologies In- loan.
Include the amount on Form N-158 along with your come Tax Credit.—There should be attached to this Lines 22. Adjustments.—Report your pro rata share
investment interest expense from other sources to de- Schedule K-1 a copy of Form N-342A. If the form of adjustments as applicable.
termine how much of your total investment interest is is not attached, contact your corporation as you will Line 23. Interest penalty on early withdrawal of
deductible. need to attach a copy of the form to the Hawaii net in- savings.—The amount of line 23 is included on the
Lines 15b(1) and 15b(2). Investment income and come tax return you file in order to receive the credit. “Other adjustments” line of the Hawaii Subtractions
investment expenses.—Use the amounts on these Figure your credit on Form N-342 and attach Sched- Worksheet of the N-11 Instructions (attach an expla-
lines to determine the amount to enter on line 1 of ule K-1 to your return. nation to Form N-11).
Form N-158. Line 16i. Important Agricultural Land Qualified
Caution: The amounts shown on lines 15b(1) and Agricultural Cost Tax Credit.—Figure your credit on Recapture of Tax Credits
15b(2) include only investment income and expens- Form N-344 and attach Schedule K-1 to your return. Line 24. Recapture of Hawaii Low-Income Hous-
es reported on lines 4, 5, 6, and 13 of this Schedule Line 16j. Tax Credit for Research Activities.— ing Tax Credit.—Report your pro rata share of recap-
K-1. If applicable, the corporation will have listed in Your share of the Tax Credit for Research Activities is ture of the Hawaii Low-Income Housing Tax Credit
the line 30 Supplemental Information section any oth- shown on line 16j. Figure your credit on Form N-346 from section 42(j)(5) partnerships and other sourc-
er items of investment income and expenses report- and attach Schedule K-1 to your return. es. Complete Form N-586. See Form N-587, Low-
ed elsewhere on this Schedule K-1. Be sure to take Line 16k. Historic Preservation Income Tax Cred- Income Housing Credit Disposition Bond, for an
these amounts into account, along with the amounts it.—Your share of the Historic Preservation Income alternative to credit recapture.
on lines 15b(1) and 15b(2) and your investment in- Tax Credit is shown on line 16k. Figure your credit on Line 25. Capital Goods Excise Tax Credit Proper-
come and expenses from other sources when figuring Form N-325 and attach Schedule K-1 to your return. ties.—You should receive a completed copy of Form
the amount to enter on line 1 of Form N-158. Line 16l. Renewable Fuels Production Tax Credit N-312, Part II from the corporation. Use this informa-
Credits for Years After 12/31/21.—Your share of the Renew- tion to determine the amount of credit recapture on
All filers should complete the appropriate forms to able Fuels Production Tax Credit for Years Beginning Form N-312.
claim their pro rata share of credits. Also attach a After 12/31/21 is shown on line 16l. Figure your cred- Line 26. Recapture of the Tax Credit for Flood Vic-
copy of this Schedule K-1 to the Hawaii net in- it on Form N-360 and attach Schedule K-1 to your re- tims.—Report your pro rata share of recapture of the
come tax return you file to support your credit. turn. Tax Credit for Flood Victims on Form N-338.
Line 16m. Pass-Through Entity Tax Credit.—Your Line 27. Recapture of Important Agricultural Land
Line 16a. Fuel Tax Credit for Commercial Fish- share of the Pass-Through Entity Tax Credit is shown Qualified Agricultural Cost Tax Credit.—Report
ers.—Figure your credit on Form N-163 and attach on line 16m. Figure your credit on Form N-362 and at- your pro rata share of recapture of the Important Ag-
Schedule K-1 to your return. tach Schedule K-1 to your return. ricultural Land Qualified Agricultural Cost Tax Cred-
Line 16b. Total cost of qualifying property for the Line 16n. Credit for Hawaii income tax withheld on it on Form N-344.
Capital Goods Excise Tax Credit.—Figure your Form N-288A.—If there is an amount on line 16n, in- Line 28. Recapture of Capital Infrastructure Tax
credit on Form N-312 and attach Schedule K-1 to clude this amount on Schedule CR, line 9a and attach Credit.—Report your pro rata share of recapture of
your return. See Form N-312 and Tax Information Re- Schedule K-1 to your Form N-11 or N-15. the Capital Infrastructure Tax Credit on Form N-348.
lease No. 2001-4 for additional information. Line 16o. Credit for Hawaii income tax withheld Line 29. Recapture of Historic Preservation In-
Line 16c. Amounts needed to claim the Enterpriseon Form N-4 (Nonresident shareholders only).— come Tax Credit.—Report your pro rata share of
Zone Tax Credit.—There should be attached to this If there is an amount on line 16o, include this amount recapture of the Historic Preservation Income Tax
Schedule K-1 a copy of Form N-756A showing your on Form N-15, line 54. Credit on Form N-325.
share of the corporation’s amounts needed to claim Line 16p. Pro rata share of net income tax paid
the credit. If the form is not attached, contact your cor- (Resident and part-year resident shareholders
poration as you will need to attach a copy of the form only).—A resident or a part-year resident sharehold-
er shall be considered to have paid a tax imposed on

PDF file checksum: 2515297799

(Plugin #1/10.13/13.0)