Strategic Compliance and Calculation: Navigating the DBEDT Questionnaire Part B for the Hawaii R&D Tax Credit (HRS §235-110.91)

The DBEDT Questionnaire Part B is the mandatory administrative and technical component required for Qualified High Technology Businesses (QHTBs) to receive certification for the Hawaii R&D Tax Credit (TCRA). It serves as the primary mechanism for the Department of Business, Economic Development, and Tourism (DBEDT) to verify that claimed Qualified Research Expenses (QREs) were conducted strictly within Hawaii, ensuring compliance with state law (HRS §235-110.91).

1. Executive Summary: The Critical Role of DBEDT Questionnaire Part B

The Hawaii Tax Credit for Research Activities (TCRA), codified under Hawaii Revised Statutes (HRS) §235-110.91, is a significant financial incentive, offering a refundable credit against state income tax for eligible QHTBs.1 The operational success of claiming this credit hinges entirely on the rigorous completion and timely submission of the DBEDT Questionnaire Part B. This questionnaire is the technical bridge that connects a company’s total qualified federal research costs to the specific amount of research costs incurred locally in Hawaii.

The information provided in Part B is critical because the state credit calculation relies on a proration ratio: the total amount of the federal R&D credit (calculated using federal Form 6765) is multiplied by the ratio of Hawaii QREs to total Federal QREs.1 Without the detailed geographic segregation of expenses provided in Part B, this ratio cannot be established, and certification cannot be granted.

The Dual Agency Structure and Administrative Necessity

The TCRA is administered through a necessary dual-agency structure involving DBEDT and the Department of Taxation (DoTax).1 DBEDT’s primary role is that of the certifying authority. It reviews the QHTB application, including the Part B data, to validate the business’s eligibility status and the calculated credit amount.3 Upon verification, DBEDT signs and issues the certification form (Form N-346A, Part II), which is mandatory for the taxpayer to include with their annual Hawaii income tax return filed with DoTax.4

Impact of the $5 Million Annual Aggregate Cap

The strategic necessity of accurate and timely Part B submission is heightened by the program’s competitive nature. The TCRA is limited by a stringent statewide aggregate cap of $5 million annually.1 The law mandates that the allocation of these funds is strictly first-come, first-served.1 While the initial submission of Form N-346A (Part A) secures the applicant’s time stamp in the queue, the final allocation is contingent upon DBEDT’s subsequent verification and acceptance of the technical and financial data presented in Part B.

2. Statutory Foundation and Recent Legislative Shifts (HRS §235-110.91)

The legal eligibility and calculation methodology for the Hawaii TCRA are defined by HRS §235-110.91, which closely aligns the state credit with federal provisions under Internal Revenue Code (IRC) §41.1

Defining the Qualified High Technology Business (QHTB) Status

To participate in the program, a business must achieve and maintain QHTB status, which DBEDT actively verifies during the application process. Eligibility centers on three core criteria:

1. Employee Limit: The QHTB must be classified as a small business, limited to no more than 500 employees.1
2. Activity Focus: The business must perform qualified research activities (QRAs) in Hawaii that constitute more than 50% of its overall activities.6
3. Qualified Research Alignment: The research activities themselves must meet the definition of qualified research under federal IRC §41, expanded to include specific high-tech fields deemed important to Hawaii’s economy, such as biotechnology, ocean sciences, and software development.1

The Critical Impact of Act 139 (2024) and the Reinstated Base Amount

Recent legislative action significantly altered the calculation requirements for the TCRA. Act 139 of 2024 (derived from Senate Bill 2497) introduced two major changes.1 First, the credit’s sunset date was extended from the prior 2024 date to December 31, 2029, providing businesses with long-term certainty.1

Second, and far more complex for compliance purposes, Act 139 repealed the prior statutory provision that had previously rendered the base amount calculation of IRC §41 inapplicable for state purposes.8 This change fundamentally reinstates the requirement to calculate the federal credit using the base amount, which must then serve as the multiplier for the state credit proration.1

The consequence of reinstating the base amount dramatically increases the burden of tax compliance. Previously, QHTBs could calculate the state credit based on a simple percentage of Hawaii QREs, independent of the complex federal historical calculation. Now, the law mandates adherence to the full federal methodology, which requires the use of the Fixed-Base Percentage multiplied by the average annual gross receipts for the four preceding tax years.1 Because the Hawaii credit is prorated based on the result of the federal calculation, this requires QHTBs to gather and retain extensive historical gross receipts data and base period QREs to ensure the federal credit input (Form N-346A, Line 3) is correctly determined. Any reduction in the federal credit due to the base amount calculation automatically results in a proportional reduction of the refundable Hawaii state credit.

3. The Mechanics of DBEDT Certification and Questionnaire Part B

DBEDT’s application process requires a structured, multi-part submission designed to manage the competitive allocation of the $5 million aggregate cap while gathering necessary technical and economic data.

The Three-Step Application Sequence and Timestamping

The application is structured into three sequential steps, leveraging an online portal:

1. Step 1: Part A Submission (Form N-346A Upload): The taxpayer uploads the completed and signed Part I of Form N-346A. This step is purely administrative but strategically vital: the date and time DBEDT receives this signed form is considered the applicant’s official application date/time.6 Given that the cap is often reached moments after the application window opens (typically early March), this timestamp is the primary factor determining if the QHTB will receive any allocation.6
2. Step 2: Completion of Questionnaire Part B (1) – The Online Survey: Upon completing Step 1, the applicant is directed to an online survey.6 This component collects descriptive, qualitative, and economic data used by DBEDT for mandatory program review and economic impact analysis, as required under HRS §235-110.91(j).11 This data includes descriptions of the research project(s) undertaken 13, identification of industry sector, information concerning intellectual property, Hawaii revenues, and workforce size.14
3. Step 3: Submission of Questionnaire Part B (2) – The Expense Workbook: This critical step requires the QHTB to download, complete, and upload a specific .xls file.6 This workbook houses the core financial and geographic segregation data needed to calculate the Hawaii Expense Ratio.

Detailed Meaning: Part B (2) as the Geographic Segregation Tool

The definitive purpose of Questionnaire Part B (2) is to provide documented proof that the expenses claimed for the credit meet the stringent geographic requirements of Hawaii law. This technical function ensures that the state only provides incentives for research performed within its borders.

The structure of the data submission, often mirrored in Form N-346A (Part I, Lines 1a through 1f), explicitly requires a side-by-side comparison of expenses:

DBEDT guidance explicitly states that expenses attributable to research activities outside Hawaii do not qualify for the state credit.2 Therefore, Part B (2) acts as the geographic gatekeeper, demanding detailed cost accounting records (wages, supplies, contract costs) that definitively tie expenditures to Hawaiian operations.

DBEDT’s Certification and Verification Authority

DBEDT meticulously reviews the data submitted in Part B to ensure it supports the tentative credit amount claimed on Form N-346A. If the information is accepted and verified, DBEDT provides the official certification by signing Part II of Form N-346A.3 DBEDT anticipates completing this certification process around June 30.6

Furthermore, DBEDT maintains the authority to request substantiating documentation, including underlying payroll and expense records, as part of their verification process.1 This audit power emphasizes the need for QHTBs to retain detailed records for a minimum of four years, ensuring full accountability for the research costs reported in Part B.

4. Calculating the Hawaii R&D Tax Credit (The Ratio Principle)

The fundamental legal requirement under HRS §235-110.91 is that the state credit must be calculated as a prorated share of the federal credit. The data provided in Part B is the sole source for calculating this proration factor.

The Hawaii Calculation Formula (Proration)

The refundable Hawaii TCRA is calculated by multiplying the validated federal tax credit amount by the Hawaii Expense Ratio.1

$$\text{Hawaii TCRA} = \text{Federal R\&D Tax Credit (Form 6765)} \times \frac{\text{Eligible Hawaii QREs (Part B Col B)}}{\text{Total Eligible Federal QREs (Part B Col A)}}$$

Determining the Federal Credit Input (Form 6765)

The prerequisite for claiming the state credit is the successful computation and claim of the federal credit for increasing research activities under IRC §41.4 The amount entered on Line 3 of Form N-346A must match the final federal credit derived from Federal Form 6765.13

Following the 2024 legislative changes in Act 139, QHTBs must now utilize the complex federal base amount calculation to determine the federal credit.10 This involves determining the fixed-base percentage and applying it to the average annual gross receipts from the four preceding tax years to calculate the base amount. The federal credit is then calculated based on the qualified research expenses that exceed this base amount.1 The need for this full federal calculation directly impacts the integrity and complexity required in gathering the input data for Part B, even though Part B itself primarily focuses on the geographic split of current-year QREs.

Deriving the Hawaii Expense Ratio (Form N-346A Line 2)

The Hawaii Expense Ratio is the central output of the Part B submission. This ratio is calculated by dividing the total Hawaii-only QREs (Column B) by the total federal QREs (Column A). This result must be entered on Line 2 of Form N-346A, typically rounded to six decimal places.13

The importance of this ratio cannot be overstated; it quantitatively justifies the amount of state credit being claimed. DBEDT’s audit process focuses heavily on ensuring that the documentation substantiates the geographic exclusivity required for the numerator of this fraction.

5. State Revenue Office Guidance and Compliance Deadlines

Compliance with the Hawaii TCRA program requires navigating strict deadlines and regulatory requirements imposed by both DBEDT and DoTax.

DBEDT Guidance: The First-Come, First-Served Cap Strategy

The single most consequential piece of guidance DBEDT provides relates to the $5 million annual cap and the corresponding first-come, first-served allocation.1 DBEDT guidance frequently warns that the cap is reached almost immediately upon opening the application window (e.g., applications for 2025 opened on March 3rd).1

For QHTBs, this competitive environment transforms the Part B preparation process from a routine tax procedure into a high-stakes, time-sensitive compliance event. The application date/time is established by the initial upload of Part A (Form N-346A). This administrative priority is paramount. However, this secured priority is provisional. DBEDT must still review and verify the subsequent Part B submission. If Part B contains significant errors, is incomplete, or requires extensive clarification, the review process stalls. During this delay, other, fully compliant QHTBs may proceed to certification and exhaust the $5 million aggregate cap.15 Consequently, even a company that secures an early timestamp may ultimately fail to receive funding if the technical data provided in Part B is flawed, demonstrating that administrative quality is equally as important as speed in this program.

Mandatory Post-Certification: The Annual Compliance Survey

A requirement separate from the initial application (Part B) is the mandatory annual compliance survey. HRS §235-110.91(i) and (j) mandate that all certified QHTBs must complete and file an annual survey on electronic forms prescribed by DBEDT.11

This survey is typically due by June 30th.1 The data collected, which includes detailed information on research activities, intellectual property, Hawaii revenues, and workforce, serves DBEDT’s legal mandate to collaborate with DoTax to study the long-term effectiveness of the tax credit.11 Legislative history indicates that this continuous data collection is essential for justifying the program’s continuity, including its extension through 2029.15 Critically, the law explicitly states that failure to satisfy the annual survey requirement shall constitute a waiver of the right to claim the credit.2 This compliance failure voids the credit retroactively, making the June 30th deadline a high-risk administrative necessity.

Department of Taxation (DoTax) Filing Requirements

Once DBEDT has reviewed Part B and issued the certified Form N-346A (Part II), the taxpayer is responsible for filing the claim with DoTax. The taxpayer must attach three key documents to their Hawaii income tax return:

1. The certified Form N-346A (including DBEDT’s signature).4
2. Hawaii Form N-346 (the tax credit claim form).4
3. Federal Form 6765 (used to calculate the required federal input).4

The primary benefit of the Hawaii TCRA is its refundable status; any portion of the certified credit that exceeds the taxpayer’s liability is paid directly to the taxpayer in cash.1

6. Practical Example: Applying Part B Data to TCRA Calculation

This example demonstrates how the geographic segregation required by DBEDT Questionnaire Part B (2) is used to calculate the refundable tax credit, integrating the complexity of the federal base amount requirement reinstated by Act 139.

Case Study: Kaua’i Ocean Sensor Technology (QHTB)

A QHTB specializing in ocean sciences, located in Kaua’i, incurs research expenses primarily in Hawaii but uses a small mainland contract laboratory for specialized testing. The business ensures that it meets the QHTB criteria (under 500 employees, >50% research activities in Hawaii).

The QHTB compiles the necessary data for the Part B (2) workbook (corresponding to Form N-346A, Line 1g):

Hawaii QRE Segregation Data

Step-by-Step Calculation (Incorporating Act 139)

1. Federal Credit Determination (Form 6765): The QHTB must first calculate its federal credit, which now requires subtracting the base amount.

• Act 139 Requirement: Assume the QHTB calculates its federal Fixed-Base Amount based on historical data to be $600,000.
• Excess QREs: $1,000,000 (Total QREs) – $600,000 (Base Amount) = $400,000.
• Federal Credit (20% Regular Rate): $400,000 $\times$ 20% = $80,000. (This amount is entered on Form N-346A, Line 3).

1. Part B Data Submission and Verification: The QHTB submits the Part B (2) workbook, clearly showing the geographic segregation: Total Federal QREs of $1,000,000 and Hawaii-Only QREs of $720,000. The non-qualifying mainland contract research costs are excluded from Column B, demonstrating compliance with the geographic exclusivity rule.
2. Calculating the Hawaii Expense Ratio (Form N-346A, Line 2): DBEDT uses the submitted Part B figures to determine the proration ratio.

• Ratio = $\frac{\text{Hawaii QREs}}{\text{Total Federal QREs}} = \frac{\$720,000}{\$1,000,000} = \mathbf{0.720000}$ (This decimal is entered on Form N-346A, Line 2).

1. Final Hawaii TCRA Calculation (Form N-346A, Line 4):

• Hawaii TCRA = Federal Credit $\times$ Hawaii Expense Ratio
• Hawaii TCRA = $80,000 $\times$ 0.720000 = $57,600.

This $57,600 is the final, certified refundable credit claimed by the QHTB on Hawaii Form N-346. The example demonstrates that the complexity of the federal calculation (Step 1) provides the necessary input, but the geographic integrity of the Part B submission (Steps 2 and 3) ultimately determines the state’s financial allocation.

7. Conclusion and Strategic Recommendations

The DBEDT Questionnaire Part B is the regulatory instrument that translates the statutory requirements of HRS §235-110.91 into auditable financial data. It is essential for verifying QHTB status, enforcing the geographic limitations of research expenditures, and providing the quantitative input needed to calculate the state’s refundable tax credit.

Key Strategic Takeaways

The strategic landscape of the Hawaii TCRA is uniquely defined by the collision of increased computational complexity (due to Act 139’s reinstatement of the federal base amount) and intense administrative urgency (due to the $5 million annual cap). The technical integrity of the Part B submission is crucial to bridging the gap between securing a timely application timestamp and obtaining final certification. If the financial segregation in Part B is inadequate, DBEDT’s review process will stall, risking the loss of allocation to subsequent, more compliant applicants, regardless of initial submission speed.

Furthermore, the legal mandate requiring the annual compliance survey underscores that the compliance obligation extends beyond the initial credit claim; failure to file the survey post-certification results in a complete statutory waiver of the credit, irrespective of the initial claim’s validity.

Recommendations for QHTB Leadership

1. Mandate Detailed Geographic Cost Segregation: QHTB leadership should ensure internal financial systems track and document Qualified Research Expenses (QREs)—including wages, supplies, and contract costs—with project codes or expense categories that explicitly isolate expenditures geographically to the State of Hawaii. This level of granularity minimizes the risk of audit complications during the DBEDT review of Part B (2).2
2. Prioritize Pre-Application Preparation: The entire federal calculation (including the base amount from Form 6765) and the detailed financial segregation for Part B (2) must be completed and internally audited well in advance of the application window opening. This preparation ensures that the QHTB can secure the vital first-come, first-served time stamp with a technically accurate submission, maximizing the chances of receiving an allocation under the constrained $5 million cap.6
3. Establish Robust Post-Certification Compliance Tracking: Implement a robust internal tracking system to monitor and execute the mandatory annual compliance survey deadline (typically June 30) for all certified years. This administrative requirement is non-negotiable, and oversight results in a statutory waiver of the credit previously claimed.1

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