The D.C. Unincorporated Business Franchise Tax is imposed on certain unincorporated businesses carrying on or engaging in a trade or business in the District with gross receipts of $12,000 or greater. The tax applies to certain LLC, Partnership and Individuals and is filed on Form D-30. Taxpayers are subject to tax at a rate of 8.25% on net profits, with a minimum tax due of $250. A reasonable salary allowance is allowed for owners to arrive at taxable income.
An unincorporated business carrying on a business in the District and another jurisdiction, must apportion its income among D.C. and the other jurisdiction based on sales. Full payment of tax is due on April 15th and estimated tax payments are required. Penalties and Interest for late filing or late payment of tax can be severe. You must register for a franchise tax account with the Office of Tax and Revenue (OTR) prior to filing any business tax form.
Most self-employed consultants are exempt from the tax filing requirement if 80 percent of gross income is derived from personal services rendered by the members of the entity and capital is not a material income-producing factor. Thus, many self-employed individuals are able to escape the unincorporated franchise tax as if they were being paid wages. For D.C. resident taxpayers who do owe franchise tax, an adjustment subtraction is available on Form D-40 for income taxed on a franchise tax return. While this avoids double taxation, it may expose a taxpayer to a higher franchise tax rate than he would otherwise pay as an individual.
Rental real estate activities that generate income of $12,000 or greater are required to register and pay the unincorporated franchise tax. Though many rental activities generate tax losses, the minimum payment of $250 is due. Rental properties sold at a taxable gain would also owe franchise tax. In order to apply or maintain your business license for your rental activity, you will have to attest that no taxes are owed to OTR and that the business has “clean hands.”
Corporations (including LLC’s taxed as a corporation) are required to file Form D-20, Corporate Franchise Tax Return and are subject to franchise tax based on a single sales factor and market source rules. This recent change was intended to increase the tax base as D.C. lowers its franchise tax rate in recent years. However, many Corporations are arguably overpaying their Franchise Tax as they may have foreign source contracts that appeal to markets outside of the District.
For District purposes, a Subchapter S Corporation is a C Corporation. Said another way, the District does not recognize the S Corporation flow through for federal tax purposes. A single member D.C. LLC who has elected to be taxed as a separate entity, now is subject to a corporate franchise tax. This entails tax account registration, estimated tax payments, perhaps a higher tax rate and possible double taxation, as Virginia does not allow a credit for franchise taxes paid.
Before establishing your choice of business entity, you should consult a District of Columbia Business Franchise Tax Attorney to evaluation your options and tax liability, particularly if you reside outside the District.