CCH Tax Day Report
The District of Columbia recently enacted the Fiscal Year 2017 Budget Support Act of 2016. This legislation enacts on a permanent basis several corporation franchise and personal income tax changes as well as two new medicaid hospital fees. These changes were previously reported when passed as emergency legislation. (TAXDAY 2016/07/29, S.9) Provisions governing property tax changes (TAXDAY 2016/08/23, S.3) are covered separately.
Corporate Franchise Tax Return Dates
The legislation changes the due date for the District’s corporation franchise tax returns. For tax years beginning after December 31, 2015, corporation franchise tax returns will be due on or before the 15th day of April. However, if the taxpayer operates on a fiscal-year basis the return must be filed on or before the 15th day of the 4th month following the close of the fiscal year. Currently, these returns are due by March 15 if the taxpayer operates on a calendar-year basis, or by the 15th day of the third month following the close of the tax year if the taxpayer operates on a fiscal-year basis.
Statutory Corporate Income Rate Reduction Mechanism
Further, effective the statutory rate reduction mechanism of Sec. 47-181, D.C. Code, that allows incremental decreases in the corporate franchise and unincorporated business tax rates based upon the level of recurring revenues in the District is extended through fiscal year 2017. The determination is made after recalculations by the District’s Chief Financial Officer (CFO) with the September 2016 estimate. The legislation also reenacts previously reported changes to the possible rates of the corporation franchise tax and the unincorporated business tax under the statutory rate reduction mechanism. Based upon availability of funding, the tax rates can be incrementally reduced to 9.2%, 9.0%, 8.75%, 8.5%, or 8.25%. Previously, the statute did not provide for a possible tax rate of 9.2%. Both taxes are currently imposed at a rate of 9.4%, but the District’s CFO has certified that revenue collections were sufficient to trigger a reduction to 9.0% for tax years after 2016.
The legislation also amends the deduction allowed to combined groups when the combined reporting requirements for unitary businesses result in an increase to the combined group’s net deferred tax liability. For the 7-year period beginning with the 10th year of the combined filing, a combined group will be entitled to a deduction equal to 1/7 of the net increase in the taxable temporary differences that caused the increase in the net deferred tax liability that results from the imposition of the combined reporting requirements. Previously, the deduction applied for the 7-year period beginning with the 5th year of the combined filing. For tax year 2015, if there is an underpayment of estimated tax as a result of this deduction, the estimated tax interest from the underpayment may be waived upon application.
Low Income Housing Credit
The District of Columbia legislation amends the low-income housing tax credit that can be taken against the income, insurance premium, or corporate franchise tax for a qualified project (rental housing development that receives an allocation of federal low-income housing tax credits) to state that during the pilot period of the credit the Department of Housing and Community Development can make available $1 million in total credits in tax year 2017. Previously, the $1 million pilot period cap referred to tax year 2016.
Personal Income Tax Credit for Principal Place of Residence
The personal income credit allowed to District of Columbia residents who own their principal place of residence has also been amended. The maximum credit amount of $1,000 and the eligibility income threshold of $50,000 ($60,000 for eligible senior claimants) will continue to be adjusted annually for inflation based on the Consumer Price Index. However, for the maximum credit amount, if adjustment does not result in a multiple of $25, it will be rounded down to the next multiple of $25. For the eligibility income thresholds, if the adjustment does not result in a multiple of $100, it will be rounded down to the next multiple of $100. Also, if the consumer price index has a negative annual inflation rate the maximum credit and eligibility income thresholds will not be reduced.
Previously Reported Tax Haven, Standard Deduction and Personal Exemption Provisions
The legislation also reenacts several income tax provisions that have previously been enacted in other legislation, on an emergency or temporary basis:
The legislation repeals the listing of specific countries considered tax havens that was added by Act 21-127 (D.C.B. 21-283), Laws 2015. The definition of a “tax haven” remains unchanged. The definition impacts the corporate income and apportionment factors of members doing business in tax havens for reporting on a water’s-edge unitary combined basis.
For purposes of calculating the personal income standard deduction and dependent deduction amount, the cost-of-living adjustment has been amended to clarify that the consumer price index used in the calculation is for either the calendar year beginning January 1, 2011, or the calendar year beginning one calendar year before the calendar year in which the new dollar amount of a deduction or exemption becomes effective, whichever is later. Previously, only the consumer price index for calendar year beginning January 1, 2011 was used.
The cap on the amount of the personal exemption allowed to individuals whose adjusted gross income exceeds $150,000 has been slightly changed in that it is reduced by 2% for every $2,500 (or fraction thereof) by which the taxpayer’s adjusted gross income for the taxable year exceeds $150,000. Previously, the personal exemption was reduced by 2% for every $2,500 of the excess of the adjusted gross income over $150,000.
Special Assessments on Hospitals
Beginning October 1, 2016 and continuing until it expires September 30, 2017, the District may charge each hospital a fee based on its outpatient gross patient revenue. The fee will be charged at a uniform rate necessary to generate an amount equal to the non-federal share of the total available spending room under the Medicaid upper payment limit for private hospitals and for District operated hospitals applicable to the District fiscal year 2017 consistent with the federal approval of the authorizing Medicate State Plan amendment and the Department of Health Care Finance’s administrative expenses. A psychiatric hospital that is an agency or a unit of the District government is exempt from the fee, unless the exemption is adjudged to be unconstitutional or otherwise invalid. The fee will cease to be imposed or not take effect in certain situations including if federal matching funds are not available, the Medicaid State Plan amendment is not approved by the federal Centers for Medicare and Medicaid Services, or the fee is determined to be an impermissible tax under the Social Security Act. The fee will be due and payable by the 15th of the last month of each District fiscal year quarter. However, the fee is not due and payable until (1) the District issues written notice that the payment methodologies for payments to hospitals have been approved by the federal Centers for Medicare and Medicaid Services and (2) the District issues written notice to each hospital informing it of its fee rate, outpatient gross revenue subject to the fee, and the fee amount owed on a quarterly basis.
Beginning October 1, 2016 and continuing until it expires September 30, 2017, the District may charge each hospital a fee based on its inpatient net patient revenue. The fee will be charged at a uniform rate necessary to generate no more than $10.4 million. A psychiatric hospital that is an agency or a unit of the District government is exempt from the fee, unless the exemption is adjudged to be unconstitutional or otherwise invalid. The fee will be due and payable by the 15th of the last month of each District fiscal year quarter. However, the fee is not due and payable until the District issues written notice to each hospital informing it of its fee rate, inpatient net patient revenue subject to the fee, and the fee amount owed on a quarterly basis.
Insurance Premiums Tax
A new exemption is allowed for surplus lines insurance producer allowed to procure policies from companies that are not authorized to do business in the District. When a surplus lines agent or broker is engaged by the District government to procure insurance on its behalf, they will be exempt from the requirement to pay the 2% tax on gross premiums on all kinds of policies procured on behalf of the District government. Further, several of the provisions relating to captive insurance have been amended to clarify that they apply to insurance related to personal property, not just insurance related to real property.
Act 21-488 (D.C.B. 21-669), Laws 2015, approved August 18, 2016, effective after a 30-day congressional review period, except as otherwise provided, applicable October 1, 2016