Navigating Compliance: The DBEDT Certification and the Hawaii Research Activities Tax Credit (HRS §235-110.91)

I. Executive Summary: The Hawaii R&D Tax Credit Defined

The DBEDT Certification Application is the mandatory administrative process required by the Hawaii Department of Business, Economic Development, and Tourism (DBEDT) to verify a business’s eligibility and qualified research expenditures (QREs) before claiming the state’s refundable Research Activities Tax Credit (TCRA). This certification, formally issued via Form N-346A, is prerequisite for all Qualified High Technology Businesses (QHTBs) seeking to utilize the valuable tax incentive under HRS §235-110.91, especially given the state’s strict $\$5$ million annual allocation cap.

The Hawaii Tax Credit for Research Activities (TCRA), codified under Hawaii Revised Statutes (HRS) §235-110.91, is a critical economic incentive designed to stimulate local innovation and investment by QHTBs that conduct research within the state.1 The core appeal of the Hawaii TCRA, distinguishing it from non-refundable credits offered by many other jurisdictions, lies in its fully refundable nature.1 This means that if the calculated credit exceeds the taxpayer’s total Hawaii income tax liability, the excess amount is paid out to the business in cash, providing crucial liquidity, particularly for high-growth, early-stage technology companies that may not yet be profitable.3

The mechanism for accessing this refundable incentive is inherently procedural, demanding explicit certification from DBEDT before the Department of Taxation (DOTAX) can finalize the claim.1 This dual-agency oversight system ensures technical eligibility related to the research activity is confirmed (by DBEDT) before the fiscal credit is granted (by DOTAX). The legislative structure imposes a strict annual aggregate cap of $\$5,000,000$ on the total credits that DBEDT can certify each taxable year.3 The policy decision to combine full refundability with a stringent first-come, first-served (FCFS) cap demonstrates a highly targeted legislative strategy. While refundability maximizes the financial stimulus and liquidity benefit for eligible recipients, thereby encouraging high-risk R&D investments, the static $\$5$ million cap controls the state’s overall fiscal exposure. This balance creates a highly competitive environment where timely and accurate DBEDT certification is not merely a compliance requirement but the primary determinant of financial realization for the business.

II. Statutory Foundation and Eligibility Requirements

The Enabling Legislation and Fixed Federal Linkage (HRS §235-110.91)

The calculation methodology for the Hawaii TCRA is rooted in federal law, specifically the credit for increasing research activities provided by Internal Revenue Code (IRC) Section 41.2 This linkage simplifies the determination of qualified research expenses (QREs), as it leverages the established federal framework.

However, the state statute introduces a crucial legislative decoupling that significantly increases the technical compliance burden. HRS §235-110.91 mandates that the federal tax provisions in IRC §41 must be applied as enacted on December 31, 2011, irrespective of any subsequent changes or amendments made to that federal section.3 Taxpayers are required to utilize the definitions, computational methodologies (such as the base amount calculation), and rules exactly as they existed under the 2011 federal statute. This necessitates that Qualified High Technology Businesses (QHTBs) run a specialized, parallel calculation—often referred to as the “fixed standard” or “decoupled” calculation—using obsolete federal tax law rather than relying solely on the methodology utilized for their current-year federal Form 6765 filing. This requirement demands specific expertise in historical R&D tax law, increasing the cost of compliance and introducing a barrier for firms attempting self-preparation of the claim.3 Furthermore, to qualify for the Hawaii credit, the taxpayer must actively claim the corresponding federal R&D tax credit for the same qualified research activities.3

Defining the Qualified High Technology Business (QHTB)

The TCRA is not available to all businesses that perform research. The incentive is strategically aimed at a very specific subset of the business community defined as a Qualified High Technology Business (QHTB). Under HRS §235-110.91, a business must satisfy three rigorous criteria to achieve QHTB status 2:

1. Small Business Status: The entity must be defined as a small business, meaning a company with no more than five hundred employees.4
2. Local Research Focus: The company must conduct more than fifty per cent of its activities in qualified research within the State of Hawaii.3
3. Registration: The business must be formally registered to conduct business within the State of Hawaii.2

Impact of Act 139, SLH 2024

Recent legislation has solidified the future of the TCRA program. Act 139 (SLH 2024), which became effective July 1, 2024, and applies to taxable years beginning after December 31, 2023, confirmed key aspects of the program and provided essential longevity.5 Crucially, Act 139 extended the sunset date of the research activities tax credit program to December 31, 2029.4 This seven-year extension provides critical stability for technology companies relying on the credit for long-term capital investment planning. The Act also confirmed the definition of a QHTB as a small business with no more than 500 employees that conducts more than 50 percent of its qualified research in Hawaii.5 Furthermore, Act 139 clarified that the base amount calculation under IRC §41 would be reinstated, and the application fee for the DBEDT certification process would be waived, simplifying the procedural requirements for applicants.2

The table below summarizes the core statutory requirements and constraints of the program:

Hawaii R&D Tax Credit: Statutory Eligibility and Program Constraints

III. The Crucial Role of DBEDT Certification

The Department of Business, Economic Development, and Tourism (DBEDT) operates as the gatekeeper for the TCRA, managing the critical certification process that validates the technical and geographic components of the tax claim.

Meaning of DBEDT Certification Application

The DBEDT Certification Application represents the statutory process by which the agency fulfills its mandated responsibilities: to maintain detailed records of taxpayers, verify the technical nature and location of the qualifying research activities, and confirm the accuracy of the total qualified costs or expenditures claimed.3

Upon successful review, DBEDT issues a formal certificate to the taxpayer, known as Form N-346A.4 This certificate formally verifies the QRE amounts, the credit amount certified for the taxable year, and the cumulative amount of the credit claimed during the credit period.3 The Form N-346A is an indispensable document; it must be obtained by the QHTB and included alongside the required Hawaii Form N-346 and Federal Form 6765 when submitting the state income tax return to DOTAX.4

The certification process begins with the QHTB submitting a written, certified statement to DBEDT identifying qualified expenditures made and the amount of the tax credits claimed during the previous taxable year.2 This application is typically processed between March 3 and March 31 for calendar year filers.2

The Annual Cap and First-Come, First-Served (FCFS) Allocation

The most consequential element of the DBEDT certification is the management of the strict annual aggregate credit cap. HRS §235-110.91 limits the total amount of credits that DBEDT can certify across all QHTBs in any given taxable year to $\$5,000,000$.3

DBEDT is legally obligated to immediately cease certifying credits and notify DOTAX if this $\$5$ million threshold is met.3 To manage this limitation, DBEDT allocates credits on a strict FCFS basis, determined by the timestamp of the certified statement submission.3

This allocation rule institutionalizes temporal competition among eligible taxpayers. Because the credit is highly desirable and the cap is relatively low compared to the potential demand from a growing technology sector, waiting until the typical April income tax filing deadline is fiscally risky. Taxpayers must proactively prepare their documentation—including the specialized 2011-based federal credit calculation and the Hawaii QRE allocation—immediately following year-end to ensure their certified statement is among the first to be submitted during the specified March application window.2 Success in obtaining the certification, therefore, depends less on the ultimate technical complexity of the claim and more on the timeliness and precision of the initial administrative submission.

IV. State Revenue Office Guidance and Compliance Procedures

The administration of the Hawaii TCRA relies on careful coordination and statutory separation of duties between DBEDT and the Department of Taxation (DOTAX). DBEDT verifies technical eligibility, research activity, and manages the annual allocation cap, while DOTAX handles the processing of the income tax claim, liability offset, and issuance of the refund.1 DBEDT is also mandated to collaborate with DOTAX to study the program’s effectiveness, which directly informs the required compliance reporting.3

Key Procedural Deadlines and Filing Obligations

Compliance with the TCRA requires QHTBs to successfully meet three distinct, critical deadlines across the calendar year following the qualified research activity:

1. Certified Statement Submission (N-346A Filing)

Every QHTB seeking the credit must submit a written, certified statement detailing qualified expenditures and the amount of the tax credits claimed to the Director of Taxation (DOTAX) before March 31 of the year following the taxable year when the expenditures were made.2 This filing serves two purposes: it informs DOTAX of the impending claim, and critically, it secures the QHTB’s position under the DBEDT $\$5$ million FCFS cap. This process typically involves submitting the required information (often associated with DBEDT Form N-346A) to DBEDT during the March filing window.2

2. Annual Economic Compliance Survey

A second critical reporting obligation is the mandatory annual survey/questionnaire that must be filed electronically with DBEDT before June 30 of the calendar year following the year in which the credit is claimed.3 This survey is a key element of the state’s program evaluation, designed to provide data sufficient to measure the effectiveness of the tax credit.3 Information required includes the number and type of jobs created, compensation levels, external services and materials procured, industry sector information, revenue/expense data, and details on intellectual property filed.3

The regulatory framework emphasizes the severity of this compliance step: credits will be disallowed for those who fail to complete this mandatory questionnaire by the June 30 deadline.4 This enforces the state’s requirement for economic accountability. Failure to provide the required economic justification data, even after securing the initial March 31 certification, results in the forfeiture of the credit.

3. Final Tax Claim Filing

The formal claim for the credit must be filed with DOTAX using Hawaii Form N-346, including the previously certified Form N-346A, within 12 months after the close of the taxable year for which the credit is claimed.2 This twelve-month period is the final window for both original and amended claims. The law explicitly states that failure to properly claim the credit before this final deadline constitutes a waiver of the right to claim the credit.3

Hawaii R&D Tax Credit: Key Compliance Deadlines and Agency Responsibilities

Required Forms and Flow-Through Treatment

QHTBs must utilize a specific set of forms to successfully claim the credit:

• Federal Form 6765: Used to compute the basis for QREs and the calculated federal credit amount under the 2011 IRC §41 standard.4
• DBEDT Form N-346A: The official certificate issued by DBEDT verifying the QREs and the approved credit amount.4
• Hawaii Form N-346: The state tax form used to compute the final deductible and refundable credit amount.4

For flow-through entities, such as partnerships, S corporations, estates, or trusts, the credit passes through to the owners or shareholders (via Schedule K-1). These individuals then claim the credit against their personal income tax liability, following specific instructions detailed on Form N-346.2

V. Detailed Calculation Methodology

The calculation of the Hawaii TCRA is a proportional calculation that links the federally determined credit amount to the percentage of research activities conducted within the state.7 This calculation involves a sequence of highly specific steps:

Step 1: Determining the Federal R&D Credit Amount (2011 Fixed Standard)

The QHTB must first determine the theoretical Federal Tax Credit Amount. This calculation must adhere strictly to the rules and definitions of IRC Section 41 as enacted on December 31, 2011, regardless of any current federal law.3 This results in a Federal TCRA basis figure, determined by the chosen method (Regular or ASC, based on the 2011 standard), using the total QREs incurred by the business nationally.7

Step 2: Calculating the Hawaii Proration Fraction

To determine the portion of the credit attributable to Hawaii, a proration fraction is established.7

• The Numerator is the amount of eligible research expenses (QREs) that are specifically and exclusively attributable to research activities conducted within the State of Hawaii.7
• The Denominator is the total amount of eligible research expenses (QREs) used to calculate the federal tax credit (the total federal QREs).7

The ratio $\left( \frac{\text{Hawaii QREs}}{\text{Total Federal QREs}} \right)$ effectively isolates the local R&D investment relative to the total R&D investment.

Step 3: Arriving at the Refundable Hawaii Credit

The final Hawaii TCRA is calculated by multiplying the Federal TCRA Amount (derived from the 2011 basis) by the Hawaii Proration Fraction.9

$$\text{Hawaii TCRA} = \text{Federal TCRA Amount (2011 Standard)} \times \left( \frac{\text{Hawaii QREs}}{\text{Total Federal QREs}} \right)$$

This resulting credit is first used to offset the taxpayer’s net income tax liability imposed by Chapter 235 for the taxable year. If the calculated credit exceeds the tax liability due, the excess amount is refunded to the taxpayer, provided the refundable portion is at least $\$1$.3 The statutory definition of a QHTB requires that the entity conduct more than 50 percent of its activities in qualified research in the state.3 This legal requirement provides assurance that the proration fraction will be greater than 0.50, translating a substantial portion of the federal basis credit into a refundable state incentive.

TCRA Calculation Methodology and Proration

VI. Example Scenario: Applying the DBEDT Certified Credit

This example illustrates the procedural compliance required by DBEDT and the subsequent calculation performed by DOTAX, based on a representative case study.10

Scenario Context

A Honolulu-based optical communications company, confirmed as a QHTB (satisfying the small business and $>50\%$ Hawaii research requirements), conducted a comprehensive R&D study for the 2025 tax year.

Compliance Action: DBEDT Certification Timeline (For 2025 Tax Year, Filed in 2026)

1. March 2026 (Certification Submission): The company must submit its certified statement, verifying the $\$850,000$ in HI QREs and claiming the expected credit amount of $\$85,000$ (as calculated below).2 Because this submission is prioritized and sent early in the March FCFS window, the claimed amount is successfully reserved under the $\$5$ million cap. DBEDT issues the signed N-346A form upon approval.4
2. June 30, 2026 (Mandatory Survey): The company submits the comprehensive electronic economic survey to DBEDT, detailing job creation and procurement data.3 Compliance with this deadline ensures the already certified credit remains valid.
3. December 2026 (Final Filing): The company files its 2025 Hawaii income tax return (Form N-346) along with the certified N-346A.4 The filing is within the 12-month window following the close of the tax year.7

Calculation Steps (2025 TCRA)

1. Determine Proration Fraction:
   
   $$\text{Proration Ratio} = \frac{\text{Hawaii QREs}}{\text{Total Federal QREs}} = \frac{\$850,000}{\$1,200,000} \approx 0.7083$$
2. Calculate Hawaii TCRA:
   
   $$\text{Hawaii TCRA} = \text{Federal TCRA Basis} \times \text{Proration Ratio} = \$120,000 \times 0.7083 = \$85,000$$
   
   (Note: This differs from the $\$170,000$ credit cited in 10, which may reflect a different, pre-prorated calculation or statutory rate, but the current statutory method requires the proration fraction applied to the federal basis.)
3. Determine Refundability:

• Total Certified Credit: $\$85,000$
• Hawaii Income Tax Liability Offset: $\$10,000$
• Refundable Portion: $\$85,000 – \$10,000 = \$75,000$

The business successfully receives a $\$75,000$ cash refund, demonstrating the high financial value of the refundable TCRA. The requirement that a QHTB must perform over 50 percent of its research activities in Hawaii guarantees that the proration fraction is greater than 0.50, ensuring that a significant majority of the calculated federal basis credit translates directly into a refundable state benefit, thus reinforcing the goal of maximizing local economic development.

VII. Conclusion and Strategic Recommendations

The DBEDT Certification Application is the defining procedural step that unlocks the Hawaii Research Activities Tax Credit (TCRA). It operationalizes the mandates of HRS §235-110.91 by verifying the QHTB status, quantifying the qualified expenses, and—most critically—managing the competitive allocation process imposed by the $\$5$ million annual cap. The TCRA program, particularly after the extension provided by Act 139, SLH 2024, is one of the most robust state R&D incentives in the nation due to its full refundability and sustained legislative commitment through 2029.

Achieving the credit, however, requires navigating a complex administrative triad involving DBEDT’s technical certification, DOTAX’s refund processing, and adherence to specific, time-sensitive requirements that are decoupled from standard federal compliance. The requirement to use the fixed 2011 IRC §41 standard for the credit basis necessitates specialized tax expertise to perform the calculation accurately and concurrently with current federal filings.

Strategic Recommendations for QHTBs

1. Prioritize Temporal Compliance: The March 31 certified statement submission date for Form N-346A is the most critical deadline. Due to the FCFS mechanism and the $\$5$ million cap, QHTBs must treat R&D documentation and calculation as a priority immediately following the close of the taxable year to ensure early submission and allocation of the limited funds.
2. Ensure Regulatory Dualism in Calculation: Tax planning departments must dedicate resources to perform a dual calculation: one based on current federal IRC §41 rules and a separate, fully compliant calculation based specifically on the IRC §41 methodology as enacted on December 31, 2011. Failure to adhere to the fixed 2011 standard will invalidate the calculation basis for the state credit.
3. Mandatory Economic Reporting: The June 30 DBEDT annual economic survey is as essential as the tax claim itself. Companies must ensure internal data capture systems are configured to provide the required metrics on employment, wages, and procurement, as failure to file this non-tax compliance report results in the complete disallowance of the already certified credit.
4. Maximize Hawaii QREs: Given the QHTB requirement that over 50 percent of activities must be in Hawaii, the business should strategically ensure that qualified research activities are clearly documented as being conducted within the state, as this maximizes the proration fraction and, consequently, the value of the final refundable credit.

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