Understanding the 20% Tax Break for Hawaii Small Businesses

Navigating tax regulations can be tricky, but for Hawaii small business owners, there’s a valuable opportunity worth understanding: the Hawaii 20% Small Business Tax Deduction. This deduction—officially known as the Qualified Business Income (QBI) Deduction under Section 199A—was introduced through the Tax Cuts and Jobs Act of 2017 and remains a significant tax-saving tool for small businesses across the US.

If you’re running a sole proprietorship, partnership, S corporation, or LLC in Hawaii, this federal tax break can reduce your tax bill and improve your bottom line. And when paired with reliable accounting services in Hawaii, it becomes even easier to manage compliance and make smarter financial decisions.

What Is the Hawaii 20% Small Business Tax Deduction?

At its core, this deduction allows eligible small businesses to deduct up to 20% of their qualified business income (QBI) from their federal taxable income. For Hawaii small business owners, this can mean a substantially lower effective tax rate—making more room in the budget for reinvestment and growth.

Why This Matters in Hawaii

• High combined tax rates: Without the deduction, Hawaii’s small business owners may face combined federal and state tax rates approaching 50.6%.

• Lowering your effective rate: With the deduction, the effective tax burden becomes more manageable, bringing it closer to the rate paid by C-Corporations (around 27.4% combined).

How the 20% Deduction Helps Hawaii Small Businesses

Understanding the broader benefits of this tax break helps business owners plan better. Here’s how it supports the overall health and growth of your business:

1. Lowers Your Taxable Income

Reducing your taxable income by up to 20% can have a real impact on your bottom line.

• Frees up capital for business needs

• Supports smoother cash flow management

• Makes it easier to plan long-term with your accountant or tax advisor

2. Drives Job Creation and Economic Growth

If made permanent, experts project major gains for the state:

• Up to 4,000 new jobs created annually

• An additional $210 million to Hawaii’s GDP each year for the next decade

These projections show that the deduction not only benefits individual businesses but also contributes to statewide economic health.

✅ Your books should work as fast as you do. Get real-time insights, automated reports, and expert guidance—all in one place. Experience live accounting here.

3. Levels the Playing Field

Hawaii’s small businesses often face competition from larger corporations with more tax advantages. This deduction helps balance things out.

• Reduces the tax gap between small businesses and C-Corps

• Supports a healthier small business ecosystem in Hawaii

4. Encourages Business Investment

Tax savings can be redirected into:

• Hiring new team members

• Upgrading equipment

• Expanding services

• Developing new products or technologies

The deduction strengthens business resilience and flexibility—both critical for long-term success.

5. Includes Wage-Based Limitations

The deduction isn’t unlimited and does phase out based on income levels. Here’s what to know:

• Phase-out starts at $191,950 for single filers and $383,900 for joint filers (2024 thresholds)

• Businesses that pay wages to employees may qualify for a higher deduction

• Working with a trusted tax professional helps ensure you don’t miss out on benefits

Summary

The Hawaii 20% Small Business Tax Deduction is a key advantage for US small business owners, especially those operating in Hawaii where combined tax rates are among the highest in the country. With the right guidance and dependable accounting services in Hawaii, small businesses can use this deduction to reduce their tax burden, invest in growth, and support stronger local economies. Understanding how it works—and when it applies—can make a meaningful difference in your financial strategy.

Modern Accounting That Finally Gets Your Business

Running a small business means wearing too many hats. Your accounting shouldn’t add to that burden. Yet traditional bookkeeping services keep asking the same questions month after month.

Counto delivers outsourced accounting that gets smarter over time. Our AI platform learns your unique business patterns and automatically handles daily transactions, while expert accountants ensure everything’s accurate. With direct WhatsApp access to your Customer Success Manager, you get enterprise-level financial management without the enterprise price tag.

Experience accounting that works as hard as you do. Our small business clients cut bookkeeping time by hours and never miss a tax deadline. Ready for accounting that understands your business? To get started, speak to us directly on our chatbot, email [email protected], or use our contact form.

Here are some articles you might find helpful:

Completing Form 1120-S

S Corp Schedule K-1 (Form 1120S)

US Partnership Taxes