On Sept. 18, Congress enacted the District of Columbia’s (District or D.C.) FY25 budget, the Fiscal Year 2025 Budget Support Act of 2024 (Act). The Act amends a wide range of tax provisions, generally consistent with the changes prescribed by the emergency budget bill enacted in July.

Substantive tax provisions affected

Applicable Oct. 1, 2024, among other changes to existing personal and business tax provisions, the Act:

1. Establishes the Vitality Fund (Section 2011)

• The Vitality Fund (Fund) is separate from the General Fund and will be administered by the Deputy Mayor for Planning and Economic Development to attract/retain businesses to/in the District, with a preference for such in the District’s central business district.
• Fund grants may be used for a variety of costs, including costs related to operations, property acquisition/leasing/improvement, workforce training/development, and hiring.
• Eligible businesses must:
  • Demonstrate that the retention/attraction of its business will have a significant positive economic impact on the District, as evidenced by factors/indices related to:
    
    • Job count and wages;
    • Property occupancy;
    • Tax revenue and other economic indices identified by D.C.; 
  • Require its employees to be on-site at a location in D.C. for at least 50% of their work hours;
  • Agree to:
    • Develop or participate in a workforce development program that provides D.C. residents opportunities for training or employment in the business’ industry; or
    • Spend at least 5% of its total annual contracting with “local business enterprises,” eligible to be certified as such under D.C. Official Code §2-218.31.
• No further bright-line eligibility requirements were provided in the Act and will likely require specific negotiations with District officials administering the Fund program on a case-by-case basis.

2.  Provides a temporary property tax abatement for certain commercial property renovations (Section 2051)

• The Act provides that certain properties that are undergoing “repositioning” within the eligible Central Washington area in the District may receive a 15-year temporary property tax abatement starting with the year that the eligible property “repositioning” is complete or, if requested by the property owner, the real property tax year during which the “repositioning” of the property is complete.
• The eligible Central Washington Area is provided in Volume 2 of the D.C. Office of Planning's 2021 Comprehensive Plan and the Comprehensive Plan Amendment Act of 2021, plus 1,750 feet linear feet in any direction beyond the planning area boundaries.
• A “repositioning” is a construction, reconstruction, alteration, or renovation to a property with a minimum of 50,000 square feet that results in the conversion of the property from a primarily office use to a use that is:
  • Not residential, or
  • An upgrade in the class of the office space to class A or higher from a class below class A.
• The property tax abated is the increase in property taxes between the base year and the current year that would have been imposed if no abatement was in effect. The base year is 2025, or if the real property taxes imposed on the property increase between real property tax year 2025 and the real property tax year in which the property is certified, the real property tax year after 2025, and before the real property tax year in which the repositioning of the property is complete, in which the real property taxes imposed on the property are greatest.
• No new properties may be selected for the temporary property tax abatement after Sept. 30, 2030.

3.  Amends the low-income housing tax credit (LIHTC) (Section 2161)

• The Act defines the size and affordability of an “eligible project” for the LIHTC, decoupling from the federal definition of a “qualified project.”
  • “Eligible project” means a District rental housing development that includes more than five housing units that will be affordable to tenants at an income level no greater than 80% of median family income for a household in the Washington Metropolitan Statistical Area as provided by the U.S. Department of Housing and Urban Development. 
• It increases the credit on an eligible project to 9% of the project’s qualified basis as defined by Internal Revenue Code Section 42(c), decoupling from the previous limitation of 25% of the value of the federal credit.
• Going forward, project owners who sell/transfer/assign a credit to another taxpayer must certify that the value of the credit received was used to ensure financial feasibility of the project. Sellers no longer have to certify that they have received a minimum consideration of 70 cents per dollar of D.C. LIHTC, or 80% of the per dollar sale price of the federal LIHTC associated with the project.
• The D.C. LIHTC recapture calculation is now decoupled from the federal LIHTC recapture calculation for credits awarded on or after Oct. 1, 2025.

4. Adopts the Finnigan apportionment method for combined reporting for tax years beginning after Dec. 31, 2025 (Sections 7001-7002)

• Going forward, a combined group of entities will be treated as a single taxpayer for purposes of sourcing receipts of the unitary group.
• The sales apportionment factors of all entities in the unitary group will be used to determine the overall apportionment of the group, regardless of whether an individual member of the combined filing group has nexus in D.C.
• Prior to the Act taking effect, the law only required the inclusion of District sales of each filing combined group member that has D.C. (income) franchise tax nexus in the apportionment formula numerator. 

5. Increases the general sales/use tax rate from 6% to 6.5% beginning on Oct. 1, 2025, and to 7% beginning on Oct. 1, 2026 (Sections 7051-7052) 

6. Eliminates the lower 3% tax rate allowed on capital gains on dispositions of certain Qualified High Technology Company (QHTC) investments (Sections 7141-7142)

• The repeal of this provision of reduced capital gain tax rate is effective on Oct. 1, 2024.

7. Subjects interest income from non-D.C. obligations to D.C. personal income tax (Sections 7211-7212)

• Only interest income from obligations of the District, D.C. Water, Washington Metropolitan Area Transit Authority, and the District of Columbia Housing Finance Agency are excluded from income subject to D.C. individual income tax for tax years beginning on or after Jan. 1, 2025.
• For tax years beginning prior to Jan. 1, 2025, subject taxpayers may exclude interest income on obligations of any state, a territory of the United States, including the District, or any political subdivision thereof, in the computation of taxable District gross income.

8. Updates the terms of the small retailer property tax relief credit (Sections 7221-7222)

• The gross receipts ceiling for eligibility has been raised from $2.5 million to $3.0 million.
• The maximum tax credit has been raised from $5,000 to $10,000.
• For tax years beginning after Dec. 31, 2024, the ceiling and maximum credit will be indexed to the Consumer Price Index for All Urban Consumers for the Washington-Arlington-Alexandria, DC-MD-VA-WV Metropolitan Statistical Area (or such successor metropolitan statistical area that includes the District).
• The tax relief credit updates take effect for tax years ending on and after Dec. 31, 2024.

9. Bifurcates residential real property tax classifications (Sections 7241-7242)

• The Act splits residential real property previously classified as Class 1, into Classes 1A and 1B.
• Class 1A pertains to nonresidential real estate that is used for Non transient residential dwelling purposes and is not Class 1B property. It is subject to a tax rate of $0.85/$100 of assessed value.
• Class 1B is also nonresidential real estate but is used for Non transient residential dwelling purposes with no more than two dwelling units. The first $2.5 million of assessed value of Class 1B property is subject to a real property tax rate of $0.85/$100. Assessed value above $2.5 million will be taxed at a rate of $1.00/$100.
  
  

What does CohnReznick think?

Taxpayers with activities in the District, particularly businesses with maintaining real property, should explore whether existing or planned capital improvements can be financially offset with grants from the Vitality Fund as well as the newly enacted property tax abatements on certain improvements of commercial real estate within the Central Washington area. Additionally, unitary businesses that file combined franchise (income) tax returns in the District should quantify the impact of Finnigan for financial reporting and cash tax purposes.