By: Fred Longwood, CPA, Tax Manager
On July 28, 2011, the District of Columbia passed legislation to provide additional revenue for funding the 2012 budget (L. 2011, Act 19-98). The provisions outlined below are subject to the approval of Congress, and will become effective after a 30 day period of Congressional review and will apply as of October 1, 2011. The legislation provides additional funding for the District of Columbia's 2012 budget through additional tax revenue, including the following:
- The requirement for combined reporting
- Imposes tax on most municipal bond interest
- The adoption of an apportionment formula with a double-weighted sales factor
- Increases the minimum franchise tax
- Extends sales tax on selected services
- Modifies the safe harbor from estimated franchise tax underpayment penalties
- Imposes a sales tax on internet sales
- Sets the real property tax rate on the first $3 million of assessed value of Class 2 property
Among the tax increases included in the legislation, the provisions most likely to have the most profound effect on tax exempt organizations located in or having nexus with the District of Columbia are:
Adoption of a double weighted sales factor:
For tax years beginning after December 31, 2010, all business income must be apportioned to the District by multiplying the income by a fraction, the numerator of which is the property
factor, the payroll factor, and the sales factor twice, and the denominator of which is four.
Currently, corporations engaging in a trade or business both in and outside DC
must use property, payroll and sales as the three factor formula to apportion their business income. This change in the apportionment calculation will result in a greater percentage of taxable revenue being allocated to the District.
Increase in minimum franchise tax:
As of December 31, 2010, the minimum corporation and unincorporated business
franchise tax increases to $250 from $100, but if District gross receipts are greater than $1 million, the minimum tax payable is $1,000. For tax exempt organizations, District gross receipts exclude exempt function revenue and are based only on gross unrelated business income. The minimum corporation and unincorporated business franchise tax is due on an annual basis regardless of the income tax liability, even in the case of a net operating loss for the year. The minimum tax is due on the original filing deadline of the return, May 15 and is payable with the extension of time to file if an extension request is being filed.
Modification of the safe harbor for estimated tax:
For tax years beginning after December 31, 2011, a payment of estimated tax by an individual is not considered to be an underpayment when it equals 25% of the lesser of: (1) 90% of the tax shown on the return for the taxable year (or, if no return is filed, 90% of the tax for the taxable year); (2) 110% (previously, 100%) of the tax shown on the individual's return for the preceding taxable year if the individual filed a return for the preceding taxable year consisting of 12 months; or (3) 110% (previously, 100%) of the tax computed on the basis of the facts shown on the individual's return for the preceding taxable year if the individual filed a return for the preceding taxable year consisting of 12 months.
In the case of corporations, financial institutions, and unincorporated businesses, an estimated payment is not considered an underpayment when it equals 25% of the lesser of: (1) 90% of the tax shown on the entity's return for the taxable year (or, if no return is filed, 100% of the tax for the taxable year); or (2) 110% (previously, 100%) of the tax shown on the entity's return for the preceding taxable year if the entity filed a return for the preceding taxable year consisting of 12 months.
Fred Longwood is a manager in Tate & Tryon’s nonprofit tax department and can be reached at email@example.com.