United States

District of Columbia enacts budget modifying QHTC tax benefits

TAX ALERT  | 

On July 22, 2019, District of Columbia Mayor Muriel Bowser signed the Fiscal Year 2020 Budget Support Emergency Act (Emergency Act), enacting provisions related to the District’s FY2020 budget. Among other changes, the Emergency Act modifies Qualified High Technology Company (QHTC) incentives, originally enacted in the year 2000, offering qualifying technology businesses a number of tax credits and exemptions.

Effective for taxable years beginning after Dec. 31, 2019, the Emergency Act reduces the credit allowed against the corporate income tax for QHTCs for wages paid to qualified employees from 10% to 5% of wages paid during the first 24 months of employment. The cap on the credit allowed for each qualified employee is reduced from $5,000 to $3,000 per taxable year. Although the credit reduction is effective for tax years after Dec. 31, 2019, qualifying QHTCs should note that the provisions impact employees hired after Dec. 31, 2017. Additionally, the 10-year carry-forward period for any unused amount of credit no longer applies for qualified employees hired on or after Oct. 1, 2019.

The Emergency Act also limits the availability of the reduced 6% franchise tax rate available to QHTCs that are corporations. Currently, QHTCs are exempt from the business franchise tax for five years after the date that the QHTC generates taxable income, with the total benefit of that exemption limited to $15 million. Once the five-year period of the full exemption elapses, QHTCs are taxed at a reduced rate of 6%. However, beginning Jan. 1, 2020, QHTCs are instead allowed a credit against the franchise tax in an amount equal to the lessor of $250,000 per taxable year, or the difference between the amount of tax that would otherwise be due under the franchise tax and the reduced rate of 6%. The credit is allowed for five taxable years from the later of 1) the tax year ending Dec. 31, 2019, or 2) the last year the QHTC is eligible to receive an exemption.

Finally, the Emergency Act repeals the sales tax exemptions allowed for QHTCs beginning Jan. 1, 2020. Currently, sales of certain intangible property by QHTCs and sales to QHTCs of computer software, or hardware and visualization and human interface technology equipment are exempt from the District’s sales tax.

Takeaways

While certain benefits stand to be curtailed for QHTCs, there are still several advantages for operating in the District, including:

  • An exemption from the business franchise tax for five years
  • Non-corporate QHTCs are still exempt from District franchise tax
  • A credit for employment relocation costs
  • Credits for retraining costs and wages for qualified disadvantaged employees
  • A real property tax abatement and
  • A personal property tax exemption

Taxpayers with questions about the District’s amended QHTC incentives or other available credits should contact their tax advisers with questions.

Next steps

The Fiscal Year 2020 Budget Support Act was also signed by the mayor on the same day as the Emergency Act. The Fiscal Year 2020 Budget Support Act will be submitted to Congress for a 30-day review period. The Emergency Act is effective for 90 days, or through Oct. 20, 2019, essentially enacting the provisions of the Fiscal Year 2020 Budget Support Act while under congressional review.

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