Timing Isn't Everything, It's the Only Thing (Part 2)

by Tom Yamachika, President, Tax Foundation Hawaii

We have been looking at timing and how poor timing can lead to tremendously bad results in Hawaii's tax system.

This week’s illustration of how timing is important involves the Hawaii Renewable Energy Technologies credit, which often applies when people install solar electric, also known as photovoltaic or PV panels on their residence.

Consider this situation. A husband and wife spend $15,000 on a PV installation that for them is a major investment in their house. They’re relying on the $5,000 state credit, as well as the federal credit and other incentives, to make the deal pencil out. They sign a contract with a solar installer in late 2012. Construction begins in 2012 and is completed in 2012. The installer tests the machinery, sees that everything works, and gives the taxpayers a "commissioning report" saying that the system was ready in 2012. The installer applies to the electric company and the building department. The building department issues an electrical permit approval in 2013. The electric company gives their permission to connect to the grid in 2013, and the system is switched on in 2013.

Now, the key question: Is the credit properly claimed in 2012 or 2013? Okay, tax pros and alternative energy buffs, let's see if you can get this right. The spoiler follows, so if you want to work on this answer stop reading here.

So what was your answer? "I don't know"? That answer is absolutely right. One key fact is missing.

Let's assume the taxpayers claim their $5,000 credit on their 2013 return. The return is filed on April 20, 2014 and is audited in 2015. During the audit, it comes out that the taxpayer's application for his electrical permit was approved on the first try. The inspector didn’t deny it and require corrective work, he just approved it. Under Department of Taxation Announcement 2012-14, the credit is properly taken when the permit application is made, namely 2012.

So what happens to our poor taxpayers? The credit is not allowed in 2013, so it is denied in full. Taxpayers must pay back $5,000 plus interest and maybe a $1,000 penalty (HRS section 231-36.8 states that if a taxpayer makes an excessive claim for refund or credit, the department may add a penalty of 20% of the excessive amount). Can the taxpayers claim any credit for 2012? Under this credit statute and almost every other Hawaii credit statute in the net income tax law, the credit must be claimed no later than 12 months after the end of the taxable year for which the credit may be claimed, or the credit is lost. That 12-month period ended on December 31, 2013. (Yet, the tax department has three years, not just one, to examine the return and make any adjustments.) Bzzzzt! Do not pass "Go," do not collect $5,000.

So what do you think of our tax system that places so much emphasis on timing and attaches the ultimate consequence, namely denial in full with little or no chance of fixing the error if a taxpayer gets the timing wrong? Deciding on the proper timing isn’t always easy, either for this credit or others in the income tax law. Almost all of those credit statutes have a one-year waiver rule like this one does. Should a timing mistake be treated the same as a waiver by someone who either forgot about the credit entirely or just didn’t care about it? If you don’t think so, maybe your favorite legislator can help change the rules.

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