DC Budget Bill Further Limits QHTC Program
Summary
On August 31, 2020, Mayor Muriel Houser signed the District of Columbia “Fiscal Year 2021 Budget Support Act of 2020” (Budget Act), which includes significant cuts and other changes to the Qualified High Technology Company (QHTC) tax incentives program, effective January 1, 2020. This is the second consecutive year the District has enacted legislation reducing the benefits under the QHTC program. The cutbacks to the QHTC program result from a combination cost-cutting measures and findings by the District Office of Revenue Analysis that the QHTC program is not meeting its stated objectives, such as attracting new companies to the District.
In addition to the QHTC changes, the Budget Act further delays the application of the deduction granted to combined reporting groups and expands the definition of taxable income for unincorporated businesses and conforms the District’s rules with the federal tax treatment of capital gains from opportunity zones.
Changes to QHTC Tax Incentives
The District of Columbia has provided tax incentives for taxpayers that are certified as QHTCs since 2000. However, the original benefits, which included income tax rate abatements, various employee credits, sales and use tax exemptions, and property tax abatements, have been significantly curtailed or eliminated in the two most recent budgets (e.g., the 2019 legislation repealed the sales and use tax exemptions for QHTCs and reduced the hiring credit benefits (See BDO’s 2019 Alert).
The Budget Act imposes a more stringent requirement to qualify as a QHTC. Effective for tax years 2020 and thereafter, a business must have at least 10 qualified employees in the District rather than at least two. The business still must own or lease office space in the District and generate more than 51 percent of its District-sourced receipts from qualified high technology activities.
The Budget Act repeals beneficial rules applying to corporate taxpayers that are subject to the District’s franchise tax (which includes S corporations). The abatement of the franchise tax for the first five years an entity has taxable income, followed by a five-year reduced rate of 6%, is repealed, with the result that QHTCs are subject to the regular franchise tax rate of 8.25%.
The Budget Act also reduces the maximum credit that can be claimed for wages paid to qualified disadvantaged employees from $20,000 to $10,000, and it suspends the relief from tax on capital gains derived from the sale or exchange of an investment in a QHTC for tax years 2020-24.
In addition to these changes, the Budget Act repeals the following QHTC provisions:
- Personal property tax exemption for items purchased by a QHTC for the 10 year-period beginning in the year of purchase;
- Election to expense certain depreciable business assets;
- Income tax credit for the cost of employee relocation; and
- Rollover of capital gains from qualified stock to other qualified stock.
Modification of Taxable Income Definition of Unincorporated Businesses
For tax years beginning on or after January 1, 2021, the Budget Act expands the definition of taxable income for purposes of the District’s Unincorporated Business Tax that is imposed on general and limited partnerships, limited liability companies and other unincorporated businesses. Taxable income will include “gain from the sale or other disposition of any assets, including tangible assets and intangible assets, including real property and interests in real property, in the District, even when such a sale or other disposition results in the termination of an unincorporated business.”
Unitary Combined Reporting Deferred Tax Liability Deduction
The Budget Act further delays the application of the group deferred tax liability deduction under unitary combined reporting. The deduction originally was to apply to tax years beginning on or after January 1, 2011 to help reduce any increase in a combined group’s deferred tax liability resulting from the District moving to combined reporting. This deduction was allowed to be taken in seven equal installments starting with the fifth year of combined filing, which was tax year 2015. However, the deduction was delayed until 2020, and the Budget Act now postpones the deduction until 2025, which is the 15th year of combined filing. To prevent any underpayment of estimated tax for tax year 2020 due to an expectation of the deduction, the resulting interest will be waived.
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