1. Chun Kerr Dodd Beaman & Wong1 84601.6 Rev. 2008 Note: recently enacted Act 178 (Session Laws of Hawaii, 2009) has made significant changes to the tax incentives discussed herein. An updated powerpoint presentation will be uploaded shortly, but in the meantime, please consult with a tax advisor to learn about the newly enacted changes.

2. Chun Kerr Dodd Beaman & Wong2 84601.6 Rev. 2008 Act 221 QHTB Tax Incentives as revised Act 215 (2004)* 100% Investment Credit 2 QHTB 1 Stock/Equity Option income - excluded from income tax for employees, officers, directors 1 QHTB = > 50% devoted to Qualified Research (QR) & > 75% QR in Hawaii: - R & D - Software development * - Biotechnology - Performing arts products - Sensors and optics - Ocean sciences - Astronomy - Non-fossil fuel energy-related technology 2 100% Investment Credit: QHTB must be Hawaii-based (property, capital or property in Hawaii) and: more than 75% of QR in Hawaii; or more than 75% of gross income derived from QR on sales from and mfr. in Hawaii Revenues $$ 20% R&D Credit * Refundable No base limitation Royalty & license fees excluded from income tax

3. Chun Kerr Dodd Beaman & Wong3 84601.6 Rev. 2008 Allocate ITC to provide multiple credits Tax-indifferent partners* Hawaii tax- averse partners Special Purpose Partnership or LLC HAWAII QHTB Allocate full $2M ITC** $1M $2M *Usually obtains more equity interest in partnership or LLC to compensate for giving up credits **Allocation allowed by statute: HRS Section 235-2.45(d) Limitations: see slide 11

4. Chun Kerr Dodd Beaman & Wong4 84601.6 Rev. 2008 Non-QHTB Tax Incentives 4% Hi-tech Renovation Credit (added 2001) hi-speed telecom security environmental electrical power General Excise Tax Exemptions Exports Scientific contracts Capital goods excise tax credit— 4% taken off income tax Pyramiding relief phased in Related Party Exemptions Enterprise Zones Income tax holiday GET holiday Property tax holiday UI holiday Foreign Trade Zone Movie Production Credit Renewable Energy Tax Credit

5. Chun Kerr Dodd Beaman & Wong5 84601.6 Rev. 2008 Hawaii High Technology Initiatives (Act 221) In order to encourage the growth of high technology businesses in Hawaii, the legislature has provided a number of tax incentives for qualified high technology businesses (QHTBs): –100% high technology investment tax credit for investors (ITCs) –Refundable 20% tax credit for research expenditures (R&D credit) [Act 215] –Income tax exclusion for (a) royalties and (b) stock-related transactions –Increase capital loss carryforward period

6. Chun Kerr Dodd Beaman & Wong6 84601.6 Rev. 2008 Qualified High Technology Business (QHTB) Definition: –A business, employing or owning capital or property, or maintaining an office, in Hawaii provided that: > 50% of its total business is in qualified research and > 75% of its qualified research is performed in Hawaii (Activity test) or > 75% of its gross income is derived from qualified research and the income is received from (1) products sold from, manufactured in, or produced in Hawaii or (2) services performed in Hawaii (Income test)

7. Chun Kerr Dodd Beaman & Wong7 84601.6 Rev. 2008 QHTB “Qualified research” – Research and development under Internal Revenue Code Section 41 – Computer software development for sale or license – Biotechnology – Performing arts products – Sensors and optics – Ocean sciences – Astronomy – Non-fossil fuel energy-related technology

8. Chun Kerr Dodd Beaman & Wong8 84601.6 Rev. 2008 QHTB (con’t.) Businesses should obtain a QHTB comfort ruling from the State of Hawaii Department of Taxation to ensure that they qualify as a QHTB –Form A-9 (Request for a High Tech Comfort Ruling) –See Hawaii Tax Department’s website (http://hawaii.gov/tax/) –Fee: $1,000

9. Chun Kerr Dodd Beaman & Wong9 84601.6 Rev. 2008 QHTB (con’t.) Annual information return filing requirement –Form N-317 (Statement by a Qualified High Technology Business) Tax year 2006 and prior years –Paper form due on April 20 following the tax year Tax year 2007 and forward (Act 206) –Online form on the Hawaii Tax Department’s website –Due June 30 following the tax year –$1,000 per month penalty for failure to file ($6,000 max) –Effective: July 1, 2007 (applies to investments received after June 30, 2007)

10. Chun Kerr Dodd Beaman & Wong10 84601.6 Rev. 2008 High technology business investment tax credit (ITC) Tax incentive for investors in a QHTB Nonrefundable 100% income tax credit on investments made into a QHTB Limited to $2 million per QHTB per year Claimed over a five year period –First year - 35% (up to $700,000) –Second year - 25% (up to $500,000) –Third year - 20% (up to $400,000) –Fourth year - 10% (up to $200,000) –Fifth year - 10% (up to $200,000) Effective 2001 - 2010

11. Chun Kerr Dodd Beaman & Wong11 84601.6 Rev. 2008 Filing requirements to claim ITC [Act 215] Three step process: –Taxpayer files for certification Form N-318A (Statement of Investment in a Qualified High Technology Business) Due March 30 following the tax year Fee: –Filed by investor ($100 early filing; $150 regular filing) –Filed by QHTB on investors’ behalf ($750 early filing; $1,000 regular filing) –Tax Department sends “approval” to taxpayer Form N-318A page 2 –Taxpayer attaches “approval” to tax return (claim) with Form N-318 (High Technology Business Investment Tax Credit) The claim for the ITC must be made within 12 months following the close of the tax year

12. Chun Kerr Dodd Beaman & Wong12 84601.6 Rev. 2008 Limitation on allocating ITC to provide multiple credits [TIR 2007-02] For each dollar invested, if the ITC allocation ratio to an investor IsThen <1.5Hawaii tax department will not challenge because of safe harbor 1.5 - 2Hawaii tax department may challenge for economic substance or business purpose - Safe harbor available if satisfies both tests: (1) no frontloading of credits test and (2) limited equity shifting test >2Taxpayers are required to substantiate by proving economic substance and business purpose

13. Chun Kerr Dodd Beaman & Wong13 84601.6 Rev. 2008 Tax credit for research activities (R&D credit) Tax incentive available to QHTBs Refundable 20% tax credit on qualified research expenditures –Standard to qualify is the same as federal R&D credit except: No base amount limitation so credit applies to all qualified research expenditures, not just on the amount of increase Research must be performed in Hawaii Effective 2001 - 2010

14. Chun Kerr Dodd Beaman & Wong14 84601.6 Rev. 2008 R&D Credit Qualified research expenses are limited to expenditures for: –Employee wages (Hawaii W-2) –Supplies (nondepreciable tangible personal property consumed in Hawaii) –Contract research (services performed in Hawaii by 3rd parties)

15. Chun Kerr Dodd Beaman & Wong15 84601.6 Rev. 2008 Filing requirements for claiming the R&D credit [Act 215] Three step process: –Taxpayer files for certification Form N-319A (Statement of Research and Development Costs) Due March 30 following the tax year Fee: ($400 early filing; $750 regular filing) –Tax Department sends “approval” to taxpayer Form N-319A page 2 –Taxpayer attaches “approval” to tax return (claim) with Form N-319 (Credit for Research Activities) The claim for the R&D credit must be made within 12 months following the close of the tax year

16. Chun Kerr Dodd Beaman & Wong16 84601.6 Rev. 2008 Changes to R&D credit With the enactment of Act 215, some changes were made: –Change in the definition of computer software development Taxpayers must now intend to ultimately sell, license, or otherwise market the software for economic consideration Taxpayers must have substantial rights to the intellectual property –Elimination of the liberal construction language [Old language] It is the intention of the legislature that the amendments in this Act be liberally construed. [New language] It is the intention of the legislature that the amendments in this Act be construed in a manner consistent with the intent of this Act.

17. Chun Kerr Dodd Beaman & Wong17 84601.6 Rev. 2008 QHTB stock rights income tax exclusion Tax incentive for investors of QHTBs Income tax exemption available for –Income earned and proceeds derived from QHTB stock options or stock; and –Income earned from stock of parent company of QHTB. The parent company must possess 80% of the total voting power of the stock or other interest in the QHTB, and 80% of its total value.

18. Chun Kerr Dodd Beaman & Wong18 84601.6 Rev. 2008 QHTB royalty income tax exclusion Tax incentive available to QHTBs Income tax exclusion available for royalties earned on intellectual property developed and owned by the QHTB

19. Chun Kerr Dodd Beaman & Wong19 84601.6 Rev. 2008 Other QHTB incentives Capital loss carryovers –Instead of 5 years, QHTBs may carry forward capital losses for 15 years

20. Chun Kerr Dodd Beaman & Wong20 84601.6 Rev. 2008 Summary of QHTB formation/operation Initial steps –Form QHTB and related entities –Obtain QHTB comfort ruling from Hawaii Tax Department Operations –Investor invests money into special purpose entity or QHTB to generate ITC –QHTB conducts operations to generate R&D credit, if applicable, and other tax credits

21. Chun Kerr Dodd Beaman & Wong21 84601.6 Rev. 2008 Non-QHTB Incentives Income tax ( note: multiple credits may not be claimed on the same expenditures ) –Renewable energy technologies income tax credit –Technology infrastructure renovation income tax credit –Capital goods excise tax credit General excise tax –Exemption for related party transactions

22. Chun Kerr Dodd Beaman & Wong22 84601.6 Rev. 2008 Renewable energy technologies income tax credit Nonrefundable income tax credit for every renewable energy technology system installed and placed in service in Hawaii after June 30, 2003 –Solar thermal energy systems –Wind-powered energy systems –Photovoltaic energy systems

23. Chun Kerr Dodd Beaman & Wong23 84601.6 Rev. 2008 Renewable energy technologies income tax credit (con’t.) Credit amount –Solar thermal energy system Single family residential property –35% of actual cost or $2,250, whichever is less Multi-family residential property –35% of actual cost or $350 per unit, whichever is less Commercial property –35% of actual cost or $250,000, whichever is less

24. Chun Kerr Dodd Beaman & Wong24 84601.6 Rev. 2008 Renewable energy technologies income tax credit (con’t.) Wind-powered energy systems –Single family residential property 20% of actual cost or $1,500, whichever is less –Multi-family residential property 20% of actual cost or $200 per unit, whichever is less –Commercial property 20% of actual cost or $500,000, whichever is less Photovoltaic energy systems –Single family residential property 35% of actual cost or $5,000, whichever is less –Multi-family residential property 35% of actual cost or $350 per unit, whichever is less –Commercial property 35% of actual cost or $500,000, whichever is less

25. Chun Kerr Dodd Beaman & Wong25 84601.6 Rev. 2008 Renewable energy technologies income tax credit (con’t.) Act 204 (SLH 2008) update –No credit for single family residential solar thermal energy systems for homes with a building permit on or after January 1, 2010 –No credit for residential home developer who installs and places into service a system in 2009

26. Chun Kerr Dodd Beaman & Wong26 84601.6 Rev. 2008 Technology renovation infrastructure income tax credit Nonrefundable 4% income tax credit for renovation costs of commercial buildings in Hawaii to enable –high speed telecommunication, –physical security systems, –environmental systems, and –backup and emergency electrical systems.

27. Chun Kerr Dodd Beaman & Wong27 84601.6 Rev. 2008 Capital goods excise tax credit 4% refundable income tax credit for eligible depreciable tangible personal property placed in service and used by the taxpayer in a trade or business The claim for the credit must be made within 12 months following the close of the tax year

28. Chun Kerr Dodd Beaman & Wong28 84601.6 Rev. 2008 Exemption for related party transactions General excise tax exemption for related party transactions such as: –interest on intercompany loans, –legal and accounting services, –use of computer software or hardware, –information technology services, –database management, and –managerial and administrative services.