District of Columbia ~ Corporate, Personal Income Taxes: Combined Reporting, Double-Weighted Sales Factor, and Other Changes Enacted

On June 14, 2011, the Council of the District of Columbia enacted the Fiscal Year 2012 Budget Support Act of 2011, which provides for a combined reporting scheme for unitary groups, a double-weighted sales factor apportionment formula applicable to the District’s corporate franchise tax, and a limitation of itemized deductions for personal income taxpayers.

Combined Reporting

Applicable to tax years beginning after December 31, 2010, any taxpayer engaged in a unitary business with one or more other corporations that are part of a water’s-edge combined group must file a combined report that includes the income and the allocation and apportionment factors and other information as required by the mayor. If a worldwide combined reporting election has been made, the taxpayer must file a combined report that includes such income and factors of all corporations that are members of the unitary business and other information as required by the mayor. The enactment also provides that the mayor may require combination of additional taxpayers in order to reflect proper apportionment of income of the entire unitary businesses.

Net operating loss carryover: If the taxable income computed results in a loss for a taxpayer member of the combined group, that taxpayer member has a District net operating loss, subject to the net operating loss limitations and carryover provisions. The net operating loss will be applied as a deduction in a prior or subsequent year only if that taxpayer has District source positive net income, whether or not the taxpayer is or was a member of a combined reporting group in the prior or subsequent year.

Separate identities of group member: The use of a combined report will not disregard the separate identities of the taxpayer members of the combined group. Each taxpayer member is responsible for tax based on its taxable income or loss apportioned or allocated to the District, which would include, in addition to other types of income, the taxpayer member’s apportioned share of business income of the combined group, where business income of the combined group is calculated as a summation of the individual net business incomes of all members of the combined group. A member’s net business income is to be determined by removing all but business income, expense, and loss from that member’s total income.

Tax credits and post-apportionment deductions: No tax credit or post-apportionment deduction earned by one member of the group, but not fully used by or allowed to that member, may be used by another member of the group or applied against the total income of the combined group. A post-apportionment deduction carried over into a subsequent year as to the member that incurred it, and available as a deduction to that member in a subsequent year, will be considered in the computation of the income of that member in the subsequent year regardless of the composition of that income as apportioned, allocated, or wholly within the District.

Double-Weighted Sales Factor

For tax years beginning after December 31, 2010, a three-factor apportionment formula with a double-weighted sales factor (currently, an evenly weighted three-factor formula) has been enacted applicable to all business income.

Limitation of Itemized Deductions

In the case of an individual whose District adjusted gross income exceeds $200,000 ($100,000 in the case of separate return filed by a married individual), the amount of the itemized deductions otherwise allowable for the taxable year has been reduced by 5% of the excess of District adjusted gross income over the applicable amount.

Sales and use tax provisions are reported in a separate story. (TAXDAY, 2011/06/17, S.12)

D.C.B. 19-203, Laws 2011, June 14, 2011, effective after a 30-day congressional review period


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