On July 22, 2019, Mayor Muriel Bowser signed the District of Columbia Fiscal Year 2020 Budget Support Act of 2019 (B23-0209), which contains the Downloading Lost Revenues Amendment Act of 2019 (the Amendment).
As the name indicates, the new Amendment is aimed at reducing tax benefits to Qualified High Technology Companies (QHTCs) to increase and reallocate revenue to housing, environment, and other social programs in the District. The changes impact sales and use taxes, income tax credits, and the corporate franchise tax.
The District of Columbia provides several tax incentives for taxpayers that are certified as QHTCs. Qualifying taxpayers are those with two or more employees in the District, with an owned or leased office in the District, generating more than 51 percent of their District-sourced receipts from qualified activities. The benefits include income tax rate abatements, credits, sales and use tax exemptions, and property tax abatements.
The Amendment repeals the sales and use tax incentives as of the effective date of the bill. The Amendment also reduces the hiring credit from $5,000 to $3,000 and the percentage of qualified wages that generate the credit. Furthermore, hiring credits generated by employees hired after October 1, 2019, may no longer be carried forward. Additionally, the reduced six-percent corporate franchise tax rate is limited to five years, and there is a cap of $250,000 of benefit per tax year from the reduced tax rate.
Sales and Use Tax
Effective October 1, 2019, the Amendment repeals the sales and use tax exemptions for QHTCs found in D.C. Ann. Code Sections 47-2001(n)(2)(G) and 47-2005(31). Currently, qualifying sales by QHTCs are exempt from the District’s sales tax. The other exemptions that will be repealed include the qualifying purchases by QHTC of computer software or hardware, visualization and human interface technology equipment, including operating and applications software, computers, terminals, display devices, printers, cable, fiber, storage media, networking hardware, peripherals, and modems.
Income Tax Credits
The Amendment changes the calculation of the credit for hiring qualified employees from 10 percent of wages paid in the 24 months after hiring to 5 percent. The updated computation applies to employees hired after December 31, 2017, and will be reflected in tax returns related to tax years beginning after December 31, 2019.
The Amendment also reduces the maximum allowable credit to from $5,000 to $3,000 for each qualified employee for tax years beginning after December 31, 2019. Finally, the Amendment eliminates the ability to carry forward unused credits for employees hired on or after October 1, 2019. Unused credits generated on wages from qualified employees hired prior to October 1, 2019, are still carried forward for 10 years.
Corporate Franchise Tax
Currently, QHTCs subject to the corporate franchise tax are permitted a five-year abatement of the corporate franchise tax once the corporation has income, up to $15 million. After that, the QHTC is subject to an income tax rate of 6 percent.
For tax years beginning after December 31, 2019, the Amendment limits the application of the reduced 6 percent corporate franchise tax rate to the earlier of five years or when the taxpayer is no longer a QHTC. Furthermore, the Amendment also caps the total amount of franchise tax benefit that a QHTC may receive because of the reduced rate to $250,000 per taxable year. Under current law, there is no limit on the amount of franchise tax benefit that can result from the reduced rate.
- Since the QHTC program was first introduced in 2000, the program has undergone various modifications and refinement of definitions. As a result, taxpayers are encouraged to review the requirements annually.
- The Amendment did not change the five-year abatement of the corporate franchise tax for corporate QHTCs, subject to a $15 million total limitation or the exemption from the District’s unincorporated business tax for non-corporate entities.
- Other property tax abatements, relocation and retraining credits are still in effect.
- Due to the District’s unique legislative process, the Budget Act is subject to a 30-day Congressional review. The act was passed via Emergency Act, which enacts the provisions for 90 days while the Budget Act is under congressional review. As of this alert, the projected date that the Budget Act will become law is estimated to be October 23, 2019.
State and Local Tax Managing Director
State and Local Tax Managing Director
National Practice Tax Leader Credits & Incentives Managing Director