District of Columbia Tax Changes - October 2024

Week Of 10.07.2024

District of Columbia Provides Tax Relief for Victims of Hurricane Helene

The D.C. Office of Tax and Revenue (OTR) has announced that it will follow federal tax relief for those affected by Hurricane Helene and will extend certain tax filing and payment deadlines for individuals and businesses affected by the hurricane until May 1, 2025. (Release, D.C. Office of Tax and Revenue, 10/04/2024.)

Who qualifies for OTR relief. As outlined in IRS Notice 2024-253, the IRS will extend relief to certain taxpayers who are in any area designated by FEMA (Federal Emergency Management Agency) as a disaster area affected by Hurricane Helene. Individuals and households who reside or have a business in any one of the eligible areas and localities qualify for the OTR tax relief.

Scope of Relief. For affected taxpayers, the May 1, 2025 deadline will apply as follows:

(1) Tax year 2024 individual, estate, trust, fiduciary, partnership, corporate and unincorporated business franchise tax returns due on April 15, 2025.

(2) Individual, estate, trust, fiduciary, partnership, corporation, and unincorporated business franchise taxpayers who have a valid extension to file their 2023 returns by October 15, 2024, and extended Combined Report returns by November 15, 2024, are granted an extension for filing only. No extension is provided for 2023 tax payments that were originally due last spring before Hurricane Helene occurred.

(3) Taxpayers who had a valid extension to file their 2025 personal property tax returns (tax year ending June 30, 2025) by October 31, 2024, are given an extension for filing only. Because the 2025 personal property tax payment was due on July 31, 2024, this relief does not provide an extension for payment of the 2025 personal property tax for the tax year ending June 30, 2025.

(4) This relief applies to individual, estate, trust, fiduciary, corporation and unincorporated business estimated tax payments. For example, the 2024 quarterly estimated income tax payment normally due on Jan. 15, 2025 and the 2025 estimated income tax payment normally due on April 15, 2025.

This relief will not cover District sales and use tax returns or District withholding.

How to claim relief. Affected District taxpayers filing by paper should write in bold letters at the top of the first page of the return claiming the relief "Hurricane Helene." Affected District taxpayers filing online should attach a separate statement to their online District tax return indicating "Hurricane Helene."

Taxpayers who file electronically and are charged penalties and interest for late filing, are advised to contact the OTR's Customer Service Administration, e-Services unit at (202) 759-1946.

Week Of 09.30.2024

District of Columbia 2025 Budget Support Legislation Becomes Law

The "Fiscal Year 2025 Budget Support Act of 2024," which was sent to Congress for review, has been enacted. The legislation generally mirrors previously enacted emergency budget support legislation (Act 25-506). Among numerous provisions, the legislation: (1) for tax years beginning after December 31, 2025, adopts the Finnigan method of apportionment of income for purposes of combined group reporting; (2) enhances the retailer property tax relief credit allowed against the corporate franchise tax; (3) repeals the special 3% capital gains tax rate allowed for gains on qualifying Qualified High Technology Company (QHTC) investments; (4) makes various amendments to the District's low-income housing credit; (5) increases the general sales and use tax rate to 6.5% on October 1, 2025, to 7% on October 1, 2026; (6) eliminates the personal income tax exemption for interest received from non-D.C. state and local bonds; (7) for tax years beginning after December 31, 2024, enacts a refundable child tax credit; (8) delays an increase in the D.C. earned income tax credit match level to 100% of federal credit until 2029; (9) amends residential property tax classifications and rates; and (10) repeals the motor vehicle excise tax exemption for electric vehicles and increases excise tax rates for gas vehicles in certain mileage categories. Other topics include changes to District sports wagering licenses, fees and tax rates; an increase in the employer contribution rate for covered employees in the Universal Paid Leave Program; and modifications to the District's clean hands certification requirements. (L. 2024, Act 25-550 (Law 25-217), effective 09/18/2024 and applicable 10/01/2024 unless otherwise provided.)

Corporate franchise tax. Combined reporting transition from the Joyce method of apportionment to the Finnigan method of apportionment: For tax years beginning after December 31, 2025, the legislation provides that a combined group of entities will be treated as one taxpayer for purposes of sourcing unitary receipts and the apportionment factor attributes in the numerator will be derived from all the members of the combined group, regardless of whether a member has nexus with the District of Columbia.

Retailer property tax relief credit—amended maximum credit amount, income threshold amount increased: Under current law, a qualified corporation/unincorporated business can annually claim a refundable credit equal to: (1) 10% of the rent paid for a qualified rental retail location, up to $5,000; or (2) the property tax paid on a qualified retail owned location, up to $5,000. For the tax year ending December 31, 2024, the legislation increases the maximum credit amount to $10,000 and will index that amount annually to inflation.

For the tax year ending December 31, 2024, the legislation also provides that a "qualified corporation/unincorporated business" means a corporation/business that is engaged in the business of making sales at retail and has less than $3 million (previously $2.5 million) in federal gross receipts or sales. For tax years beginning after December 31, 2024, the legislation will index that amount annually to inflation.

Special capital gains tax rate for QHTC investments repealed. The legislation permanently repeals the special 3% tax rate for capital gains from the sale or exchange of a qualifying investment in a QHTC that was previously suspended for tax years 2020 through 2024.

Sales and use tax. Sales and use tax rate increase: The legislation increases the 6% general sales and use tax rate to 6.5%, effective October 1, 2025 and further increases the rate to 7%, effective October 1, 2026.

District low-income housing tax credit amended. The legislation makes various amendments to the District's low-income housing tax credit program. Among these changes, the legislation provides that the owner of an eligible project may be awarded a District low-income housing tax credit with respect to an eligible project in an amount not to exceed 9% of the project's qualified basis. The qualified basis of a project is to be determined pursuant to the standards set forth in IRC § 42(c). For purposes of the credit, an "eligible project" means a rental housing development in the District that includes: (1) more than five housing units; and (2) units that will be affordable to tenants at an income level no greater than 80% of median family income.

Only the Department of Housing and Community Development (DHCD) may award District of Columbia low-income housing tax credits to eligible projects. The total credits made available for the DHCD to award are: $8.575 million in fiscal year 2025, $8.75 million in fiscal year 2026, $8.925 million in fiscal year 2027, $9.1 million in fiscal year 2028, and 105% of the total credits available for award in the prior fiscal year in each subsequent fiscal year.

The legislation also provides that if an owner of a project that was awarded or otherwise granted a District low-income housing tax credit transfers, sells, or assigns the credit to another taxpayer, the credit cannot be taken unless the owner has filed with the Department an affidavit certifying that the value received by the owner of the eligible project was used to ensure financial feasibility of the eligible project.

Personal income tax. Exclusion from gross income for interest from non-D.C. state and local bonds eliminated: For tax years beginning after December 31, 2024, the legislation provides that individuals, in their computation of District gross income, are required to include interest on the obligations of a state or any political subdivision, but not including obligations of the District of Columbia or bonds issued by DC Water, the Washington Metropolitan Area Transit Authority, and the District of Columbia Housing Finance Agency.

Child tax credit enacted: For taxable years beginning after December 31, 2024, the legislation establishes a refundable credit for each qualifying child of the taxpayer for which the taxpayer is allowed a deduction under IRC § 151. A "qualifying child" has the same meaning as under IRC § 24(c)(1). The amount of the credit will be $420 for each qualifying child who has not reached the age of six years by December 31 of the tax year, for up to a maximum of three qualifying children. The credit amount will be adjusted annually by a cost-of-living adjustment.

A taxpayer will not be eligible to receive a credit if: (1) the taxpayer does not claim the qualifying child as a dependent on the taxpayer's federal and District income tax returns for that tax year; or (2) the taxpayer was not a resident of the District for the entire calendar year preceding the year in which a claim for this credit is filed. The amount of the credit will be reduced by $20 for each $1,000 by which the taxpayer's adjusted gross income exceeds a "threshold amount." Threshold amount means the adjusted gross income reported on the taxpayer's return in the following amounts: (1) $160,000 in the case of an unmarried individual filing as single, head of household, or qualifying widow(er); (2) $240,000 in the case of married individuals or registered domestic partners filing either jointly or separately on a combined return; or (3) $120,000 in the case of an individual filing as married filing separately. For tax years beginning after December 31, 2025, these amounts will be increased annually pursuant to a cost-of-living adjustment.

Increase in D.C. earned income tax credit match level to 100% of federal credit delayed until 2029: Under current law, an individual with a qualifying child who is eligible for and claimed an earned income tax credit on their federal tax return under IRC § 32 is allowed a district earned income credit for the taxable year equal to a percentage of the federal earned income tax credit. For returns filed for a full calendar or fiscal year beginning after 2025, the percentage was scheduled to increase to 100% of the federal earned income tax credit received. The legislation delays the increase to 100% of the federal earned income credit until 2029, i.e., for returns filed for a full calendar or fiscal year beginning after December 31, 2028.

Under current law, if the amount of the district earned income tax credit is at least $1,200, the amount must be paid in 12 equal monthly payments. The legislation also provides that, for tax years beginning after December 31, 2023, if the amount is at least $1,200, the individual may elect to receive the district earned income credit in 12 equal monthly payments or one lump-sum payment.

Real property tax. Residential real property tax classifications and rates amended: For tax year 2025 and thereafter, the legislation amends D.C. property tax classifications by dividing Class 1 Property into two new classifications: Class 1A Property and Class 1B Property. Class 1A Property is comprised of residential real property that is improved and its legal use is for nontransient residential dwelling purposes, and that is not Class 1B Property. Class 1B property is comprised of residential real property that is improved and its legal use is for nontransient residential dwelling purposes with no more than two dwelling units (excluding any housing cooperative), whether as a row, semidetached, or detached structure, or comprising no more than two contiguous condominium units under common ownership; provided, that such property may be used to host transient guests pursuant to an unexpired short-term rental license endorsement.

For the tax year 2025, and thereafter, the legislation provides that the sum of the real property tax rates and special real property tax rates: (1) for Class 1A Property will be $0.85 of each $100 of taxable assessed value; and (2) for taxable Class 1B Property will be: (a) for the first $2.5 million of taxable assessed value, $0.85 of each $100 of taxable assessed value, and (b) for the portion of the taxable assessed value above $2.5 million, $1 of each $100 of taxable assessed value. Beginning with the 2026 tax year, the $2.5 million threshold amount will be increased annually by a cost-of-living adjustment.

Tax abatement program for "repositioned property" in the Central Washington Area: The legislation enacts a program providing a 15-year property tax abatement for properties in the "eligible area" undergoing a "repositioning." The property must meet eligibility requirements established by the Mayor and be selected by the Mayor through a selection process to receive and be certified for an abatement. "Eligible area" means the Central Washington Area, as set forth in Volume 2 of the District of Columbia Office of Planning's 2021 Comprehensive Plan and the Comprehensive Plan Amendment Act of 2021 plus 1,750 feet linear feet in any direction beyond the planning area boundaries. A "repositioning" means a construction, reconstruction, alteration, or renovation to a property with a minimum of 50,000 square feet that results in the conversion of the property from a primarily office use to a use that is not residential or in an upgrade in the class of the office space to class A or higher from a class below class A.

For each property selected to receive an abatement, the dollar amount of the abatement in a real property tax year will be equal to the amount by which the real property tax imposed on the property would have increased between the base year and the relevant real property tax year absent the temporary tax abatement. The "base year" means: (1) property tax year 2025; or (2) if the property taxes imposed on the property increase between property tax year 2025 and the property tax year in which the property is certified, the property tax year after 2025, and before the property tax year in which the repositioning of the property is complete, in which the real property taxes imposed on the property are greatest.

The total dollar amount of tax abatements the Mayor may certify for a property tax year, including amounts certified in prior years, cannot not exceed: (1) for property tax years 2025 and 2026, $0; (2) for property tax year 2027, $5 million; (3) for property tax year 2028, $6 million; (4) for property tax year 2029, $8 million; and (5) for property tax year 2030 and each subsequent real property tax year, 104% of the prior year's cap. No new properties may be selected to receive a property tax abatement after September 30, 2030.

Motor vehicle excise tax. Exemption for electric vehicles repealed, rates for gas vehicles increased for certain mileage categories: A motor vehicle excise tax is imposed on the issuance of a certificate of title for a motor vehicle or trailer. The legislation repeals the motor vehicle excise tax exemption for electric vehicles and imposes the excise tax on electric vehicles at the following rates: (1) unladen vehicle weight (UVW) 3,499 lbs. or less, 1% of fair market value (FMV); (2) UVW 3,500-4,999 lbs., 2% of FMV; and (3) UVW 5,000 lbs. or greater, 3% of FMV.

Rates in the following mileage categories for gas vehicles are also increased: (1) 20 mpg or less: 9% to 11% of FMV (previously 8.1% to 10.1%); 21-25 mpg: 5% to 7% (previously 4.4% to 6.4%), and 40 mpg or more: 1.5% to 3.5% (previously 1% to 3%). The rates for the 26-30 mpg and 31-39 mpg categories remain unchanged.

Miscellaneous. District sports wagering operator licenses, fees, and tax rates on certain sports wagering revenue increased: Effective July 15, 2024, the legislation provides that a 5-year Class A operator license will require a non-refundable application fee of $1 million (previously $500,000) and may be renewed for 5-year periods upon submission of a $500,000 (previously $250,000) renewal fee. The legislation creates a Class C operator license which may be issued to an eligible sports team applicant. The eligible sports team applicant must: (1) be registered with the governing body of Major League Baseball, Major League Soccer, the National Basketball Association, the National Football League, the National Hockey League, the National Women's Soccer League, or the Women's National Basketball Association; (2) play 90% or more of its home games within the District of Columbia; and (3) play its home games at a sports stadium or arena with a designated sports wagering facility approved by the District. The Class C operator license will be issued for five years and require a non-refundable application fee of $2 million and may be renewed for 5-year periods for a $1 million renewal fee.

Effective August 1, 2024, the tax rate on a Class A operators' gross sports wagering revenue is increased to 20% from 10% and the tax rate on a Class C operators' gross sports wagering revenue is set at 30%. The tax rate on a Class B operators' gross sports wagering revenue remains at 10%.

Universal paid leave program employer contribution rate increase: Under current law, a covered employer must contribute a percentage of the wages of each of its covered employees to the Universal Paid Leave Fund (Fund) that is equal to the lesser of: (1) 0.62%; or (2) the projected employer contribution rate necessary to maintain the continued solvency of the Fund.

Effective July 1, 2024, the legislation provides that a covered employer must contribute an amount equal to 0.75% of the wages of each of its covered employees to the District. Any amount collected in excess of the amount that would be needed to maintain the solvency of the Fund based on the Chief Financial Officer's annual certification will be deposited into the General Fund of the District of Columbia.

Clean hands certification: Under current law, the District government will not issue or reissue a license or permit if the applicant for the license or permit owes the District certain amounts, including more than $100 in past due taxes or more than $100 in outstanding fines, penalties, or interest, or has failed to file required District tax returns. The legislation increases the threshold to $1,000 from $100. The $100 threshold is maintained for parking fines or penalties and vehicle conveyance fees.

Business and Entrepreneurship Support to Thrive Amendment Act of 2021, Act 24-791 (Law 24-333)—applicability date provided: The Act (see State Tax Update, 03/24/2023), which makes various amendments to the D.C. business license law/fees, is made applicable on October 1, 2025.

Various property tax abatements/exemptions/rebates. Kappa Alpha Psi property tax exemption: The legislation establishes a 10-year property tax exemption for property located at 1708 S Street, NW (Lot 813, Square 0154), for the period beginning January 1, 2024, and ending January 1, 2034, so long as the property is owned by Kappa Alpha Psi Fraternity, Inc.

Mypheduh Films property tax exemption: The legislation provides a 5-year extension of the performance-based abatement of real property taxes on property located at 2714 Georgia Avenue, N.W. (Lot 884 in Square 2885), owned by Mypheduh Films, Inc. until September 30, 2034.

Studio Theatre tax exemption amended: The legislation amends the list of properties owned by The Studio Theatre, Inc. receiving an exemption from property tax, adding Lot 0058, Square 2664, and removing Lot 0094, Square 179.

Gala Hispanic Theatre tax rebate: The legislation provides a rebate to Grupo de Artistas Latinoamericanos, G.A.L.A., Inc., also known as the GALA Hispanic Theatre, for tax years beginning after September 30, 2024, for real property taxes paid with respect to Square 2837, Lot 0079, provided certain conditions are met.

Abatement provided for building converted to extended stay housing: The legislation provides that, beginning on October 1, 2028, the real property taxes imposed on the real property, including any improvements, at 1735 K Street, NW (Lot 849 in Square 163) will not be increased over the amount levied for the base year (property tax year 2025) for a 15-year period provided the owner meets certain requirements, including converting the building to primarily extended stay housing with a total project cost of not less than $40 million with a minimum of 95 units.

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