Navigating Hawaii’s pass-through entity (PTE) tax election—also known as Hawaii PTE tax or Hawaii PTET—can deliver substantial relief for S-corporations and partnerships facing the federal $10,000 State and Local Tax (SALT) deduction cap. Act 50 (SLH 2024) refined this powerful workaround, making the Hawaii PTE election more attractive and flexible for qualified businesses.
At Vertaccount, with our Hawaii office and global support, we help businesses maintain clean financials that empower smart tax decisions alongside their CPAs. This comprehensive guide explains Hawaii’s pass-through entity tax, the impact of Act 50, who benefits, key considerations, and practical next steps.
What Is a Pass-Through Entity (PTE)?
A Pass-Through Entity (PTE) includes S-corporations, partnerships, and LLCs taxed as partnerships. Business income, losses, deductions, and credits pass through to owners’ individual tax returns. The entity generally pays no entity-level income tax—owners report their share personally.
The $10,000 SALT Cap Challenge
The 2017 Tax Cuts and Jobs Act capped individual SALT deductions at $10,000 ($5,000 for married filing separately). This hits hard in high-tax states like Hawaii. Many states created elective PTE taxes so the entity pays state tax, deducts it federally as a business expense (bypassing the cap), and owners receive a state tax credit.
Hawaii’s PTE Tax Election & Key Updates from Act 50
Hawaii’s PTE tax election lets eligible S-corps and partnerships pay state income tax at the entity level. Act 50 (effective for years beginning after Dec. 31, 2023) introduced important refinements.
Core Features of the Hawaii PTE Tax Election:
Elective & Annual — Partnerships and S-corps choose yearly whether to pay at the entity level.
Tax Rate — Fixed at 9% on the sum of qualified members’ distributive shares and guaranteed payments of Hawaii taxable income (down from the prior top individual rate).
Qualified Members — Limited to individuals, trusts, or estates. Entities without qualified members are ineligible for the PTE election. Multi-tier rules were simplified/repealed.
Owner Credits — Qualified members get a Hawaii income tax credit for their pro-rata share of PTE tax paid.
Credit Carryforward — Major improvement: Unused credits carry forward indefinitely (vs. “use it or lose it” in 2023). Note: Act 58 (2025) requires adding the PTE tax share back to the member’s taxable income for years beginning after Dec. 31, 2024.
Making the Election — File annually with the Hawaii return (Form N-20 for partnerships, N-35 for S-corps) using Form N-362E. Follow Hawaii Department of Taxation guidance (TIR 2024-01 and updates).
Who Benefits Most from Hawaii’s PTE Tax Election?
Owners hit by the federal SALT cap.
Those with net federal tax savings after entity-level payment.
Hawaii-resident owners who can fully utilize (or carry forward) credits.
Decision Factors: Owner income levels, residency, business tax profile, and overall federal/state interplay. Always model scenarios with your CPA.
Important Considerations for Hawaii PTE Election
Annual Choice — Must decide each year.
Irrevocable for the Year — Once elected, it’s binding for that tax year.
Estimated Payments — Required; Act 50 offered transitional relief for early 2024.
Compliance — Accurate reporting for entity and members is critical. Clean books are essential.
Pro Tip: Use Vertaccount’s Tax-Readiness Checklist Tool to quickly assess if your financial records are optimized for PTE analysis and tax season.
What Our Clients Say
Don’t just take our word—hear from Hawaii and global clients who rely on Vertaccount for accurate, timely financials that support strategic decisions like the PTE election:
“Their accounting services have been a huge help to our operations!”
“If you’re serious about improving your small business finance, Vertaccount is worth it. Their outsourced accounting services take a lot off your plate
I’ve been working with them for almost 10 years. They’re the best!”
“Their bookkeeping and accounting services have helped us stay on track financially. Vertaccount is quick to respond, flexible, and very attentive to our needs.”
Comparison: Pre- vs. Post-Act 50 Hawaii PTE Tax
Rate: Previously tied to top individual rate (~11%); now fixed 9%.
Eligibility: Simplified “qualified members” definition; no multi-tier complexity.
Credits: “Use it or lose it” → Indefinite carryforward (with 2025 addback rules).
Overall: More predictable, accessible, and owner-friendly for S-corps and partnerships.
How Vertaccount Supports Your Hawaii PTE Strategy
We don’t prepare tax returns but provide the rock-solid financial foundation your CPA needs for PTE elections and planning.
Accurate, Timely Data — Up-to-date books for precise distributive share and PTE calculations.
Streamlined Reporting — Easy tracking of income, expenses, distributions, and guaranteed payments.
CPA Collaboration — Clean reports that save your tax advisor time (and you money).
Focus on Growth — Outsource bookkeeping so you can scale your Hawaii business confidently.
Our outsourced accounting services help businesses across Hawaii save up to 60% on overhead while gaining expert insights.
Frequently Asked Questions (FAQ) About Hawaii PTE Tax
Q: Is the Hawaii PTE tax mandatory?
A: No—it’s elective each year.
Q: What is the current rate?
A: 9% on qualified members’ Hawaii taxable income shares/guaranteed payments.
Q: Can credits be carried forward?
A: Yes, under Act 50 for 2024+ years (subject to 2025 adjustments).
Q: Who should consider the election?
A: High-income owners in Hawaii impacted by the SALT cap who can benefit federally.
Q: How do we make the election?
A: Via Form N-362E with your Hawaii return. Consult your CPA and review official TIRs.
Q: Do I need perfect books for this?
A: Yes—accurate records are critical. Our Tax-Readiness Checklist Tool is a great starting point.
Ready to Optimize Your Hawaii Business Finances?
Hawaii’s PTE tax under Act 50 offers a strategic lifeline for S-corps and partnerships battling the SALT cap. Success depends on accurate financial data, careful analysis, and expert collaboration.
Contact Vertaccount today for a consultation. Let us handle your bookkeeping and accounting so you and your CPA can focus on the best PTE election strategy and overall growth.
Contact Us | Hawaii: (808) 930-5555
