On September 18, the District of Columbia’s Fiscal Year 2025 Budget Support Act (BSA) took effect. The legislation contains several tax changes, some of which became effective October 1, and others that will take effect later, as outlined below.
Corporation Franchise Tax and Unincorporated Business Franchise Tax Changes
- Change From Joyce to Finnigan Method: Effective January 1, 2026
- For combined corporate and unincorporated business income tax filings, the District will follow the Joyce approach until 2026. Under that approach, members of a combined group that do not have nexus in the District will not have their sales included in the computation of the sales factor numerator. As a result of the BSA, for tax years beginning after December 31, 2025, the District will switch to the more commonly followed Finnegan method. Under that method, the District-sourced sales of all entities in the unitary group, whether they have nexus in the District or not, will be included in the computation of the sales factor numerator.
- Small Retailer Credit Changes: Effective for tax years ending December 31, 2024
- The BSA increased the maximum annual credit to $10,000 and the eligibility cap to $3 million in federal gross receipts, up from $5,000 and $2.5 million, respectively. For tax years beginning after December 31, 2025, the credit and eligibility cap will be increased annually in accordance with the cost-of-living adjustment.
- Repeal of the Reduced Capital Gains Rate for Qualified High Technology Companies: Effective October 1, 2024
- The reduced 3% capital gains rate on the sale or exchange of an investment in a qualified high technology company was suspended in 2020. The BSA permanently repealed that reduced rate; gains are now taxed at regular income tax rates.
Individual Income Tax Changes
Effective January 1, 2025, interest on obligations of other states and their political subdivisions that were previously exempt from taxation will be included in an individual’s District gross income. Interest earned on obligations of the District or a U.S. territory, as well as obligations issued by the D.C. Water and Sewer Authority, the Washington Metropolitan Area Transit Authority (WMATA), and the D.C. Housing Finance Agency, remain exempt.
Clean Hands Certification Changes
Effective October 1, 2024, the delinquent tax amount that will disqualify a taxpayer from receiving a certificate of clean hands will increase from $100 to $1,000.
Sales Tax Changes
Effective October 1, 2025, the general sales tax rate on the gross receipts from the sale of or charges for tangible personal property, digital goods, and taxable services will increase from 6% to 6.5%. The rate will increase to 7% on October 1, 2026.
Miscellaneous Changes
Several other tax changes can be found in the Office of Tax and Revenue’s summary.
BDO Insights
- The shift from the Joyce to Finnigan method starting January 1, 2026, will require businesses to consider their entire group's District-sourced sales, even if some entities lack nexus in the District. Taxpayers should evaluate the impact on their apportionment calculations and prepare for potential increases in D.C. taxable income. They should also review group structures and nexus considerations for 2024 and 2025.
- D.C. residents who have municipal bonds in other states should ensure they adjust their D.C. taxes accordingly. They should also consider reallocating investments to exempt bonds issued by the District or other exempt entities such as D.C. Water and WMATA.
Please visit BDO’s State & Local Tax Services page for more information on how BDO can help.