On July 28, 2020, the D.C. Council approved the Fiscal Year 2021 Budget Support Act of 2020 (“BSA”), which establishes the budget’s tax provision changes. The prior week, the D.C. Council approved the Fiscal Year 2021 Local Budget Act of 2020, which sets the budget’s expenditures. This year’s most notable event was the advertising service tax near miss. But the budget still contains numerous less-discussed tax changes, including amendments to personal property tax exemptions, the sales tax base, and the Qualified High Technology Company program incentives. And beyond this year’s budget, taxpayers should expect further changes later this year to account for the ongoing COVID-19-sized revenue gap.
What’s In the Budget?
This year’s substantial tax changes include:
- Greatly limiting Qualified High Technology Company incentives, including: (1) repealing the personal property tax exemption; (2) requiring QHTCs to have 10 (increased from 2) or more qualified employees in the District; and (3) repealing the reduced corporate franchise tax rate;
- Imposing sales tax on off-premises sales of spirituous or malt liquors, beers, and wine at the rate of 9%;
- Exempting from personal property tax certain computer software;
- For the unincorporated business franchise tax, including in “taxable income” “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”;
- Delaying the FAS 109 deduction until 2025;
- Imposing a tax and a local transportation surcharge on motor vehicle fuels sold or otherwise disposed of by an importer or by a user, or used for commercial purposes;
- Providing income tax benefits to taxpayers that invest in a Qualified Opportunity Fund (“QOF”), including the deferral of a capital gains tax payment for investing in a QOF, reduction of capital gains tax liability through a 10% step-up in basis, and abatement of capital gains tax on an investment of capital gains in a QOF;
- Abating real property tax for affordable housing in high-need affordable housing areas;
- For a decedent whose death occurs after December 31, 2020, reducing the amount of the unified credit for the estate tax to $1,545,800 (previously $2,185,800), increased annually, beginning with the year commencing on January 1, 2022, by the cost-of-living adjustment; and
- For a decedent whose death occurs after December 31, 2020, reducing the estate tax zero bracket amount to $4 million (previously $5.6 million), increased annually, beginning with the year commencing on January 1, 2022, by the cost-of-living adjustment.
What’s Out of the Budget?
On July 28th, the D.C. Council formally eliminated the advertising service and personal information sales tax proposal. Since this tax expansion became public on July 6th and voted on for the first time on July 7th, it faced massive scrutiny from the business community. Ultimately, the D.C. Council opposed the tax because of its deleterious impact on small, local newspapers.
What’s Next for the Budget?
The BSA will next be sent to the Mayor for approval or veto. It will then be sent to Congress for a 60-day period of passive review. But the D.C. Council expects to revisit the budget in a couple of months after it understands the full impact of the COVID-19 pandemic. It is an open question which tax changes the D.C. Council might propose at that time. Given the strong opposition to the advertising services tax, it is unlikely that it would resurface for so long as it impacts local media. But there is a risk that the D.C. Council would pursue personal income tax rate increases (which Councilmember Allen had proposed as an amendment to the BSA on July 7th).