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08/07/2019
DC 2020 budget support legislation brings significant tax changes
DC Mayor Muriel Bowser signed the Fiscal Year 2020 Budget Support Act of 2019. The legislation will be sent to Congress for a 30-day review. Once the legislation is approved, it will be generally applicable Oct. 1, 2019, unless otherwise provided. The Act’s more consequential provisions include:
- An increase in the sales and use tax rate on soft drinks
- A reduction in the tax credit for qualified high technology companies (QHTC) for wages paid to qualified employees, eliminating the reduced corporate franchise tax rate for QHTCs and enactment of a new QHTC franchise tax credit
- Making permanent, the refundable personal income tax credit for early learning expenses
- Enacting an additional recordation and transfer tax for certain real property valued at $2 million or more
Qualified high technology companies
QHTC Credit for Wages Paid to Employees: Currently, a corporation that is a DC QHTC is allowed a credit, against the DC franchise tax, equal to 10% of the wages, not to exceed $5,000, paid to its qualified employees engaged in a high technology activity in the District for employees hired after Dec. 31, 2017.
For tax years beginning after Dec. 31, 2019, the Act reduces the QHTC wage credit from 10% to 5%, not to exceed $3,000 of wages paid to each qualified employee for the tax year.
Tax Rate and Credit for Corporate QHTCs: Currently, DC QHTCs pay a reduced corporate franchise tax rate of 6% instead of the regular franchise tax rate of 8.25%.
For tax years beginning after Dec. 31, 2019, the Act repeals the 6% reduced tax rate available to DC corporate QHTCs, i.e., the regular franchise tax rate will apply to DC corporate QHTCs.
In lieu of the repealed 6% reduced tax rate, a DC QHTC will instead be allowed a tax credit against the corporate franchise tax in an amount equal to the lesser of either: (1) $250,000; or, (2) the difference between the amount of the franchise tax due at the regular tax rate and the amount of the tax due at the reduced QHTC rate of 6%.
Sales and use tax rate on “soft drinks”
Currently, DC impose its sales and use tax, at the general rate of 6%, on retail sales of soft drinks, except if sold for immediate consumption in which case the rate is 10%. The term “soft drink” is defined to mean any non-alcoholic beverage with natural or artificial sweeteners that does not contain milk or milk products, soy, rice or similar milk substitutes, fruit or vegetable juice (unless the beverage is carbonated), or coffee, coffee substitutes, cocoa, or tea.
The Act increases the sales and use tax rate on “soft drinks” from 6% to 8%.
Recordation and transfer tax
DC Real Property Transfer Tax Rates: The District of Columbia currently imposes its real property transfer tax at the following rates:
- 2.9% on transfers of a controlling interest in an entity that owns DC real property
- 1.45% on a deed that transfer real property in the District
- 1.45% on the recordation of a deed transferring real property
Effective Oct. 1, 2019, through Sept. 30, 2023, the Budget Act increases the DC real property transfer tax rates to:
- 5% for transfers of economic interests in real property, the value of which is at least $2 million
- 2.5% on deeds transferring Class 2 real property in the District, the consideration for which is at least $2 million
- 2.5% for recordation of Class 2 real property in the District, the consideration for which is at least $2 million
Personal income tax – “Keep Child Care Affordable Tax Credit”
As enacted, the Keep Child Care Affordable Tax Credit (previously the early learning tax credit) was to sunset for tax years beginning after Dec. 31, 2018. The Act has eliminated the credit’s sunset provision, thus making the child care credit permanent subject to the following limitations:
- For tax years 2018 and 2019, the credit is limited to $1,000 per each eligible child
- For tax years beginning after Dec., 31, 2019; the credit limit per child will be adjusted yearly pursuant to a “cost-of-living adjustment”
A taxpayer is ineligible for the child care credit if the taxpayer’s DC taxable income for the year is more than: (1) $150,000 for single, head of household, or married filing jointly; or, (2) $75,000, for married filing separately.
What does CohnReznick think?
Depending on expected income levels, DC corporate QHTCs may wish to conduct a comparative analysis of the tax impact of the lower 6% tax rate in 2019 against the higher 8.25% tax rate but with the new QHTC corporate income tax credit in 2020 and consider that there may be some tax savings in either accelerating some 2020 income into 2019 or deferring some 2019 income to 2020.
Taxpayers who have already decided on a transfer of DC real property may wish to accelerate those transactions before the new higher transfer tax rates take effect on Oct. 1, 2019.
Subject matter expertise
Corey Rosenthal
JD, Principal, Practice Leader, State and Local Tax (SALT) Services
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