Are RSU's part of Hawaiis High Tech Stock Option Income and tax credit exempt?

[hbl3973]

engzeus,

I'm not a tax lawyer.  But looking at the actual text of Hawaii law 235-9.5 which states:

"§235-9.5 Stock options from qualified high technology businesses excluded from taxation.  (a) Notwithstanding any law to the contrary, all income earned and proceeds derived from stock options or stock, including stock issued through the exercise of stock options or warrants, from a qualified high technology business or from a holding company of a qualified high technology business by an employee, officer, or director of the qualified high technology business, or investor who qualifies for the credit under section 235-110.9, that would otherwise be taxed as ordinary income or as capital gains to those persons shall be excluded from taxation under this chapter."

I would deem the sale of vested RSU shares, which is stock, to be covered by this exemption.  Whether any dividends paid while the shares were still restricted is less clear but RSU shares are stock, however restricted at the time, so I would again deem those dividends exempt.

For a 2021 list of qualified high technology businesses, I refer you to Appendix A of https://files.hawaii.gov/dbedt/economic/data_reports/HawaiiResearchTaxCredit_TaxYear2021.pdf .  I haven't tracked down a 2022 list.

[Rick19744]

Hopefully someone that has more experience with Hawaii tax will be able to chime in.

I have a few thoughts on this:

• I believe the business needs to qualify first before any benefit would be available at the individual level.
  • Have you met this initial hurdle?
• I'm not sure that an RSU would qualify.  
  • An RSU isn't an option.  The stock is just granted based on a specific vesting period.
  • When you receive an "option", you receive an option to either buy or not buy the stock at a specific price and date.  Whether you buy the stock or not is up to the taxpayer.
• Take a look at the following snippet from a ruling to a business on this matter:
  • Section 235-9.5, HRS, provides an exclusion for “all income earned and proceeds derived from stock options or stock,” including stock issued through the exercise of stock options or warrants, from a QHTB or from a holding company of a QHTB11 by an employee, officer, or director of the QHTB, or investor who qualifies for the high technology business investment tax credit in § 235-110.9, HRS, effective for taxable years beginning after December 31, 2000. This exclusion is applicable to dividends from stock or stock received through the exercise of stock options or warrants, the receipt or the exercise of stock options or warrants, and income from the sale of stock, including stock issued through the exercise of stock options or warrants.
  • I'm not sure the sole reference to "stock" in the first sentence means any stock.  I believe everything is tied to whether the income, etc. is related to an option; exercised and generates income (dividend), sold and generates income, etc.
  • I believe the "stock" reference is tied to stock as a result of exercising an option.
• Once again, that's my first blush.

[hbl3973]

It would be nice indeed if there were a Hawaii guru involved.  

One point, though, as noted in https://eqvista.com/resources/rsa-vs-rsu :

"Restricted stock options are very different from normal stock options. Regular stock options offer you the right to purchase a limited number of shares at a predefined price. But in this case, you do not become the owner of the shares until you have bought them. On the other hand, with restricted stocks, you own the shares from the first day they are issued.

The stocks are “restricted” as you will still have to earn them after they have been issued. A common restriction on these restricted stock include a vesting schedule, where the shares are earned over time. This type of plan incentivizes employees to stay with the company longer. And if an employee leaves the company early, the company can repurchase the stock back.

There are two main kinds of restricted stocks – Restricted Stock Units (RSUs) and Restricted Stock Awards (RSAs). Let’s first cover RSAs."

From this reading, the RSU recipient does own the stock.  They won't get dividends before vesting, however, but the company may choose to pay them some equivalent amount that shows up on their W-2.  (Mine did.) As those payments are not dividends in of themselves, they would not qualify for exclusion.

And, yes, in 2021 there were only 7 companies that applied and qualified for the exclusion.