Hawaii Pass-Through Entity Tax (PTET)

Why PTET matters in this state

Hawaii enacted its PTE election under Haw. Rev. Stat. §235-51.5 via S.B. 1437 (2023) — a late adopter relative to the 2020–2022 wave that produced California, New York, New Jersey, Massachusetts, and Illinois. The state's top individual rate is among the highest in the country (per HRS §235-51), and high-earner pass-through owners — typically Hawaii-sourced real-estate, hospitality, and professional-services partners — face a substantial SALT-cap bite under IRC §164(b)(6) on K-1 income. The PTE election converts Hawaii state tax on flow-through income into a federally deductible entity-level expense per IRS Notice 2020-75. Compared to peer-state regimes that came earlier and ironed out the credit mechanic, Hawaii's design carries one notable owner-side disadvantage: the credit is non-refundable, which materially reshapes the cost-benefit analysis for owners whose Hawaii liability is uneven year-to-year. The election should be modeled, not defaulted into.

Election mechanics

Form N-362E must be filed by the 20th day of the 4th month following close of the taxable year — April 20 for calendar-year filers — or by the 20th day of the 10th month (October 20) if a valid extension has been granted. The election must be signed by each member at time of election (or by a responsible party under penalty of perjury), an unusually formal requirement compared to peer states where the entity simply checks a box on the return. The election is irrevocable for that tax year and binding on all members. The entity-level rate is 9% flat for tax years 2024 and forward; the 2023 first-year rate was 11%, matching the then-highest HRS §235-51 individual rate. Owners claim the PTE credit on Form N-362. Eligible entities are S-corps, partnerships, and LLCs taxed as either.

Owner credit walkthrough

Each qualified member receives a non-refundable PTE tax credit equal to their share of tax paid (Form N-362 instructions). Allocation is pro rata by distributive share. Because the credit is non-refundable, owners with insufficient Hawaii tax liability to absorb their share of the credit may lose the unabsorbed portion. The Form N-362 instructions should be re-verified for the precise carryforward rule before electing — the manifest does not pin an automatic carryforward equivalent to California's 5-year R&TC §17052.10 window, so for now treat any unused credit as at-risk and consult a preparer on the specific carryforward language for the year in question. This is the single most important diligence step for Hawaii PTET planning: the credit may be useful, but it is not as forgiving as the refundable regimes in NY, NJ, IL, MA, MI, MN, MO, or NYC.

2026 changes

The rate dropped from 11% (2023) to 9% (2024 and forward) — the lower current rate is the operative figure for 2026 elections. No further material 2026 changes pinned this session.

Composite-return interaction

Hawaii PTE stacks with composite filing rather than precluding it; the manifest does not pin precise mechanics for this session. Practically, nonresident owners of Hawaii-sourced PTE income should consult a preparer to confirm credit allocation on Form N-15 alongside any composite filing.

§199A QBI interaction

Hawaii PTE reduces federal flow-through ordinary income per Notice 2020-75 and therefore the §199A QBI base by approximately 9% of allocated income before the federal 20% deduction. The QBI offset, combined with the non-refundable owner-credit risk, makes Hawaii PTET the most preparer-judgment-heavy election among the verified high-rate states.