Hawaii R&D Tax Credits

State and Federal Credits Available

20%

Effective Rate (Federal Share, illustrative)

Refundable

Excess Paid as Cash

$5M

Annual Aggregate Cap (First-Come)

QHTB Only 500

Employees Required

The Hawaii R&D Tax Credit for Research Activities (HRS §235-110.91) incentivizes qualified high technology businesses (QHTBs) to invest in innovative research conducted within the state, offering a refundable credit against Hawaii income tax, certified by the Department of Business, Economic Development, and Tourism (DBEDT) and claimed with the Department of Taxation. Updated in 2024 by Act 139 (from SB 2497), the credit aligns closely with federal provisions under IRC §41, including the base amount calculation, and supports key sectors like biotechnology, software development, and ocean sciences through 2029.

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20%

Effective Rate (Federal Share, illustrative)

Refundable

Excess Paid as Cash

$5M

Annual Aggregate Cap (First-Come)

QHTB Only 500

Employees Required

Key Highlights

Refundable credit equal to the federal R&D credit multiplied by the Hawaii expense ratio
Available to QHTBs conducting >50% of activities in qualified research in Hawaii
$5 million statewide cap allocated first-come, first-served via DBEDT certification (March 3–31, 2025 application)
No carryforward needed—unused portions refunded directly
Annual survey required by June 30 for compliance
Expires December 31, 2029, unless extended

Who Qualifies for the Hawaii R&D Tax Credit

Eligibility centers on QHTB status, requiring businesses to perform qualified research activities (QRAs) in Hawaii that meet or exceed federal IRC §41 standards, expanded to include state-specific high-tech fields. Certification from DBEDT is mandatory.

Eligible Entities

C Corporation May claim both the regular and basic research credit
S Corporation Limited entity-level use; can pass credits to shareholders
Partnerships / LLCs Credits pass through to owners via Schedule K-1

Qualified Research Expenses (QREs)

How to Calculate the Hawaii R&D Tax Credit

Hawaii uses a federal-aligned method, calculating the credit as a pro-rata share of the federal R&D credit based on Hawaii-sourced QREs. Per 2024 updates (Act 139), the federal base amount under IRC §41 applies—only incremental QREs qualify. Only in-state QREs count toward the ratio

Regular Method (Federal Share)

Compute your total federal R&D credit using Form 6765 (regular or ASC method, including base amount).
Determine Hawaii QREs for the tax year (wages, supplies, etc., tied to qualified high-tech activities).
Calculate the ratio: Hawaii QREs ÷ Total Federal QREs.
Credit = Federal Credit × Ratio.
Obtain DBEDT certification (Form N-346A) during the annual application window; attach to Form N-346 with your tax return.

Example Calculation

Assume $2M total federal QREs, with $1.2M excess over base yielding a $240K federal credit (20% rate). Hawaii QREs =$800K (40% ratio).

→ Hawaii Credit = $240K × 40% =$96K (refundable if exceeds liability).

If using ASC federally: Base =50% of prior 3-year average QREs; apply 14% to excess, then pro-rate.

Important: Certification is first-come until $5M cap reached. No Hawaii-specific base—use federal computation. Startups may benefit from federal fixed-base rules (3% initial phase-in).

Base Calculation fo Hawaii R&D Tax Credit

Compute federal base amount per IRC §41: fixed-base percentage × average annual gross receipts for the 4 preceding tax years (not less than 50% of current-year QREs).
Use this federal base to determine federal excess QREs = current federal QREs - base.
Federal credit = applicable percentage (e.g., 20% regular) × excess.
Then, Hawaii credit = federal credit × (Hawaii QREs / federal QREs).
For startups, fixed-base starts at 3%.

Example Calculation

Federal average gross receipts (prior 4 yrs) = $10M; fixed-base % = 5% → Base =$500K

Current federal QREs = $1.2M → Excess = $700K → Federal credit (20%) =$140K

Hawaii QREs = $480K (40% of federal) → Hawaii credit = $140K × 40% =$56K

Gross Receipts for Federal Base (Hawaii Impact)

Federal gross receipts used for base; Hawaii QREs only for ratio. Exclude non-Hawaii activities. No Hawaii receipts? Federal base still applies proportionally.

Estimate Your Credits

Hawaii-Specific Rules

Hawaii's R&D credit emphasizes high-tech innovation with strict certification and compliance to allocate the limited cap effectively.

QHTB Certification Requirements

Businesses must register in Hawaii, limit to 500 employees, and conduct >50% of activities in qualified research. Apply March 3–31, 2025 (fee waived); DBEDT reviews Form N-346A and questionnaire for approval by ~June 30. Utilization has focused heavily on computer software and biotechnology, with tens of millions of dollars in credits awarded since 2013, but cap fills quickly—early submission critical.

First-Come, First-Served Cap

$5M annual aggregate cap drives competition; allocations prioritized by application timestamp. Once exhausted, no further certifications issued that year. No per-taxpayer limit, but individual certificates have recently ranged from a few thousand dollars to roughly 700,000 dollars, with averages in the low hundreds of thousands.

Annual Compliance Survey

All certified QHTBs file a June 30 survey detailing expenditures and credits claimed. Non-filing risks losing the credit and potential audit. Ensures program accountability for ocean sciences and astronomy sectors.

Other Rules

Pass-Through Treatment: Credits apply against personal income tax for owners; pro-rata allocation via K-1
Sunset Provision: Available through December 31, 2029; monitor for extensions.
Audit Guidelines: Retain records 4 years; DBEDT/Department of Taxation may request payroll/expense substantiation.

QHTB Certification Requirements

First-Come, First-Served Cap

Annual Compliance Survey

Other Rules

Pass-Through Treatment: Credits apply against personal income tax for owners; pro-rata allocation via K-1
Sunset Provision: Available through December 31, 2029; monitor for extensions.
Audit Guidelines: Retain records 4 years; DBEDT/Department of Taxation may request payroll/expense substantiation.

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Hawaii R&D Tax Credits Case Study

Real results from a Hawaii software development firm leveraging QHTB certification for ocean tech innovation.

$192,000

total state R&D tax credits earned

60%

of QREs attributed to Hawaii activities

$480,000

total R&D tax credits earned (federal + state combined)

Frequent Asked Questions

What is the Hawaii R&D tax credit?

The Hawaii Tax Credit for Research Activities provides a refundable credit equal to the federal R&D credit under IRC §41, pro-rated by the ratio of Hawaii QREs to total federal QREs, for certified QHTBs through 2029.

What activities qualify for Hawaii’s R&D tax credit?

Qualified research must occur in Hawaii and include IRC §41 activities plus state-specific fields like commercial software design, biotechnology, sensor technologies, ocean sciences, astronomy, or non-fossil energy. Strike Tax verifies eligibility for QHTB status.

How much can my business save with Hawaii’s R&D tax credit?

Savings equal your federal credit times the Hawaii ratio—e.g., a $200K federal credit with 50% Hawaii QREs yields $100K refundable. Stack with federal for e.g., up to 40% effective relief in maximum cases. Use Strike Tax’s calculator for personalized estimates.

Are Hawaii R&D tax credits refundable or carryforward?

Fully refundable—excess over liability paid as cash refund. No carryforward provision, but refunds process with your return (amendable within 12 months of year-end).

How do I apply for Hawaii’s R&D tax credit?

Submit Form N-346A and DBEDT questionnaire March 3–31, 2025, for certification. Attach the approved certificate to Form N-346 with your Hawaii tax return. Strike Tax handles documentation and filing compliance.

Can Hawaii businesses claim both state and federal credits?

Yes, the state credit is a share of the federal credit for the same QREs, allowing full stacking without duplication. Strike Tax optimizes claims across both for maximum refunds.

What is a Qualified High Technology Business (QHTB) in Hawaii?

A QHTB is a Hawaii-registered business with <500 employees conducting >50% of activities in qualified research. Certification required annually; focuses on high-tech sectors like biotech and software.

What are the 2025 changes to Hawaii’s R&D tax credit?

Application fee waived; base amount under IRC §41 reinstated (per Act 139, 2024). Cap remains $5M first-come; extended through 2029. Survey deadline June 30 unchanged.

Does Hawaii’s R&D credit have an employee limit?

Yes, QHTBs must have no more than 500 employees to qualify for certification and credit allocation.

Why choose Strike Tax for Hawaii R&D credits?

Strike Tax ensures QHTB certification, maximizes your federal-state ratio, and navigates the competitive cap for high-tech firms in astronomy or ocean sciences.

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