|
|
|
STARTING AND OPERATING A BUSINESS IN THE DISTRICT OF COLUMBIA Copyright © 2013, Michael D. Jenkins CHAPTER 18
CONTENTS OF THIS CHAPTER:
I. INTRODUCTION I. INTRODUCTION The government of the District of Columbia holds a unique status in the country's political system, functioning as a state, county, and city. Instead of a state legislature, its laws are mostly made by the Council of the District of Columbia. Otherwise, however, it has a fairly typical tax and legal structure under which businesses must operate, not significantly unlike that of most states, but unlike any state, the District is subject to oversight by the Federal Government and Congress. The District of Columbia imposes an income tax, a franchise (income) tax on corporations, an unincorporated business tax on profits of all businesses other than corporations, a sales and use tax, various excise taxes, and property taxes on real and tangible personal property. Taxes in the District are generally quite high, especially for businesses, since, unlike most states, it imposes a franchise (income) tax on S corporations and unincorporated businesses and also has a relatively high personal income tax rate. The District has adopted a limited liability company (LLC) law and a limited liability partnership (LLP) law, so that businesses operating in the District of Columbia in LLC or LLP form may obtain the advantages of limited liability, without incorporating or becoming subject to federal corporate taxation, generally. Limited liability limited partnerships (LLLP's) may also be formed by limited partnerships that elect LLP status, in order to limit the liability of their general partners. At present, the D.C. economy is somewhat depressed, in terms of the level of unemployment, although it is one of the richest cities in America in terms of per capita income levels, and has a relatively stable economy, thanks to its vast legions of federal government employees. D.C. has a continuing and chronic problem of high unemployment, however. That situation had been improving until the end of 2007, but rose sharply in 2008 and was 12% by January of 2010, up from 8.2% a year earlier. However, the rate has declined somewhat since the recession ended, and had fallen to 9.4% by January, 2012, and to 8.6% in January, 2013, which was still considerably higher than the 7.9% national unemployment rate for that month. To view the latest federal Bureau of Labor Statistics unemployment rate data for the District of Columbia or any of the states, visit this BLS web site: BLS Local Area Unemployment Statistics The District of Columbia has a very high cost of living, making it an expensive place for employees or businesses. If you would like to do your own research of the District of Columbia laws, you can do so at this link for the D.C. Code. II. LEGAL ENTITIES -- FILING FEES AND REPORTING REQUIREMENTS. (a) In General. A business that operates in the District of Columbia can do so as a sole proprietorship, a general or limited partnership, a corporation, or a limited liability company. However, unlike most states, the District of Columbia does not recognize S corporation tax status for income tax purposes, so that they are subject to the D.C. corporation franchise tax just like any other corporation, on their income allocable to the District. The District of Columbia laws also provide for limited liability partnerships, in which no partner is liable for certain debts of the partnership, somewhat like a corporation or LLC, but with fewer legal formalities than are required for either a corporation or an LLC, and for limited liability limited partnerships, LLLP's. Each of the above entities is discussed below, along with the basic requirements for forming such an entity and any general ongoing (non-tax) reporting requirements that are applicable to it. The tax treatment of each form of legal entity is discussed in Section IV below. UPDATE NOTE: (b) Sole Proprietorships. In general, sole proprietorships in the District of Columbia can be established with no formalities. However, as discussed in Section IV(b), it is necessary for nearly all new businesses, in any form, to register with the District on the Combined Registration Application, Form FR-500. Many types of businesses, professions, and occupations will require an additional special license to operate, as discussed in Section IV(b). In addition, if you sell any kind of tangible personal property at retail or provide certain types of services, you may be required to obtain a sales tax license and collect sales tax, as discussed in Section IV(d). A sole proprietorship that earns income from sources in the District of Columbia must file an annual unincorporated business franchise tax return, and pay tax on its income from D.C. sources. While you must also report this business income on Schedule C of your federal Form 1040, it is not reportable on your District of Columbia individual income tax return. However, if your sole proprietorship business has income from other sources outside the District that is not subject to the unincorporated business tax, you must report and pay tax on that income on your individual D.C. income tax return. Doing business as a sole proprietor in D.C. is generally somewhat simpler than operating as any other kind of business legal entity. As a sole proprietor, if you have no employees, you are not required to pay any unemployment taxes, withhold any federal or state income tax from wages, or obtain workers' compensation coverage for yourself. See Section IV(c) for information on the District of Columbia unincorporated business franchise tax and for income tax and filing requirements for individuals. (c) Partnerships. The District of Columbia's partnership laws allow creation of either a general partnership, in which all partners are liable for the debts of the business, or a limited partnership, in which only the general partners are liable for debts, while the liability of limited partners is limited to the amount they have invested, in general. D.C. law also allows for the creation of a limited liability partnership, in which no partner has personal liability. Unlike most of the states, which do not tax the income of a partnership at the partnership level, the District of Columbia imposes an unincorporated business franchise tax, based on income, directly on the partnership. Income that is subject to the unincorporated business tax is generally not taxed again to the partners in the partnership, however, so that there is no double taxation of income, as can occur with corporations. Partnerships may also be required to file annual tax information returns with the District of Columbia, if the partnership has income that is not subject to the unincorporated business franchise tax, such as income from sources outside the District. Such other income must generally be reported as taxable income on the individual income tax returns of the partners who are residents of the District. For details on District of Columbia unincorporated business franchise tax and partnership income tax information return filing requirements, see Section IV(c). A partnership agreement, for any type of partnership, should spell out in considerable detail such matters as the following:
As a rule, general partnerships in the District of Columbia can be formed with no formalities, although it is highly advisable to have a written partnership agreement. However, as with sole proprietorships, it will generally be necessary to register your business with the District of Columbia on Form FR-500, Combined Registration Application, and, in some cases, you will need special professional or occupational licenses, for any type of partnership, including general or limited partnerships, or limited liability partnerships. In addition, any partnership or other business that has employees will generally have to register for, and pay, state unemployment tax on wages paid, as discussed in Section V(b). Though not required to do so, general partnerships that wish to may file a Statement of Partnership Authority with the Department of Consumer and Regulatory Affairs, specifying which partners have the authority to enter into real estate transactions on behalf of the partnership. The fee for filing such a statement is $220. In addition, under 2011 law changes, all business entities other than individual sole proprietorships are now required to file biennial reports every other year, as described in Section II(a). A limited partnership, in which there is at least one general partner (who is liable for partnership debts) and at least one limited partner (who is not liable for partnership debts), may also be formed under District of Columbia law. Unlike a general partnership, a limited partnership must generally have a written partnership agreement, and must file a certificate of limited partnership with the Department of Consumer and Regulatory Affairs, together with a filing fee of $220. Foreign limited partnerships must also register before being allowed to do business in the District of Columbia, and must also pay a registration fee of $220. As several states have done, the District of Columbia allows a limited partnership to also become a limited liability partnership -- a limited liability limited partnership, or LLLP. An LLLP is a regular limited partnership that has elected LLP status, so that the general partners in the LLLP are given the same liability protection as partners in an LLP. In addition, under 2011 law changes, all business entities other than individual sole proprietorships are now required to file biennial reports every other year, as described in Section II(a). For more information on limited partnership filing requirements, see the contact information for the offices of the District of Columbia Department of Consumer and Regulatory Affairs, listed in Section VI(a). LIMITED LIABILITY PARTNERSHIPS Limited liability partnerships (LLP's) are a relatively new form of partnership permitted under the laws of the District of Columbia. Like an LLC, an LLP provides limited liability for its owners, while retaining the tax advantages of a partnership for federal income tax purposes. However, unlike an LLC, an LLP typically operates like a regular partnership, and is not required to file articles of organization. To form an LLP in the District of Columbia, a general or limited partnership must file a registration form with and pay a filing fee of $220 to the Department of Consumer and Regulatory Affairs. Foreign LLP's, those created under the laws of another state or country, must register with the Department of Consumer and Regulatory Affairs and also pay a fee of $220. As several states have done, the District of Columbia allows a limited partnership to also become a limited liability partnership -- a limited liability limited partnership, or LLLP. An LLLP is a regular limited partnership that has elected LLP status, so that the general partners in the LLLP are given the same liability protection as partners in an LLP. Every LLP doing business in the District of Columbia, including both domestic and foreign LLP's, must file a biennial report and renew its LLP registration every other year, paying a $300 fee to the Department of Consumer and Regulatory Affairs. The biennial report is due between January 1 and April 1, following the year after the LLP is formed or a foreign LLP registered to do business in the District, and thereafter by April 1 in every other year. For more information on LLP registration and reporting requirements, see the contact information for the offices of the Department of Consumer and Regulatory Affairs, listed in Section VI(a). Note that one potential drawback of LLP's, if you will do business in other states besides the District of Columbia, is that you may not enjoy limited liability with regard to creditors of the LLP if you do business in some such states. Some states, like California and New York, only recognize certain types of professional partnerships as LLP's. Such other states may simply treat your LLP like an ordinary general partnership, with no limitation of liability. (d) Corporations.
To form a corporation in the District of Columbia, you must file
articles of incorporation with the District of Columbia Department
of Consumer and Regulatory Affairs and pay a filing fee of $220
to $1,650, depending upon the amount of authorized capital of the
corporation, as follows:
For more information on filing articles of incorporation or applying for a certificate of authority to do business in the District of Columbia, see the contact information for the offices of the Department of Consumer and Regulatory Affairs, listed in Section VI(a). In addition, under 2011 law changes, all business entities other than individual sole proprietorships are now required to file biennial reports every other year, as described in Section II(a). Failure to file this report on a timely basis could result in suspension or revocation of your corporation's charter. In addition to paying federal income taxes on its income, a corporation that does business in the District of Columbia must also file corporate franchise (income) tax returns with the District. See Section IV(c) for a discussion of D.C. corporate income tax rates and tax return filing requirements. (e) S Corporations. An S corporation is simply a regular corporation that has elected, for federal or state income tax purposes, or for both, to be taxed somewhat like a partnership, with its income, losses and tax credits flowing through to its owners, who report such income, losses, or credits on their individual tax returns. Unlike most states, the District of Columbia does not treat S corporations differently from regular corporations (C corporations) for D.C. income tax purposes. They are subject to the D.C. corporation franchise (income) tax on their taxable income that is allocable or apportionable to the District of Columbia. However, to the extent such income is taxed at the corporation level, the income is not taxable to the individual shareholders on their D.C. individual income tax returns. Income from sources outside the district is not taxable to the S corporation, but is passed through and taxable to the individual shareholders on the D.C. individual income tax returns. See Section IV(c) for a discussion of D.C. corporate income tax rates and tax return filing requirements for S corporations and other corporations. (f) Limited Liability Companies. The District of Columbia, like every state in the U.S., has adopted a limited liability company (LLC) law. Thus, in addition to the traditional choices of a sole proprietorship, partnership, or corporation, a business that operates in the District of Columbia may also choose to operate in the form of an LLC. In most states, LLC's are very attractive entities for many small businesses, in that they offer the same protection as a corporation from creditors for debts of the business, while offering much of the flexibility plus the flow-through tax treatment of a partnership for federal tax purposes. However, for D.C. tax purposes, LLC's are generally subject to the unincorporated business franchise tax on their taxable income, like partnerships. See Section IV(c) for a discussion of the income tax and franchise tax treatment of LLC's under District of Columbia tax laws. To form an LLC under the laws of the District of Columbia, you must file articles of organization with the Department of Consumer and Regulatory Affairs, which must be accompanied by a filing fee of $220. The District of Columbia LLC law did not initially recognize the validity of single-member LLC's and D.C. was one of the last jurisdictions that did not, but since 2000, the creation of single-member LLC's has been permitted. Foreign LLC's, those formed under the laws of another state or country, must obtain a certificate of registration to do business in the District of Columbia, by filing an application for a certificate of registration with the Department of Consumer and Regulatory Affairs and paying a filing fee of $220. IMPORTANT NOTE RE LLC FORMATION: In addition, under 2011 law changes, all business entities other than individual sole proprietorships are now required to file biennial reports every other year and pay a $300 filing fee, as described in Section II(a). Recent amendments to the D.C. Code now permit the formation of "series" limited liability companies (LLC's), where a single LLC may designate separate divisions or "series" that will each have limited liability, not subject to the liabilities of the other "series" if they maintain separate books and records and meet various other requirements. However, note that California's Franchise Tax Board has already announced that in California each such series LLC will be taxable as a separate LLC entity, so that a D.C. series LLC that operates more than one "series" business in California would not save on any California taxes or LLC fees. See Chapter 2, Section 2.6 for a discussion of the advantages and uses of "series" LLC's. For more information on filing articles of organization for an LLC, see the contact information for the offices of the Department of Consumer and Regulatory Affairs, listed in Section VI(a). III. BUSINESS ACQUISITIONS (a) In General. When acquiring an existing business, there are a number of District of Columbia legal and tax issues you or, preferably, your business attorney, should attend to before closing the purchase. These include matters such as doing a title search for any real property that is being acquired, checking for any recorded security interests on personal property items, and thoroughly researching D.C. and federal records for any judgment liens, tax liens, or other liens, before property is acquired. You will also benefit from consulting a tax advisor before the agreement of sale is negotiated, in order to seek a structuring of the agreement so that the purchase price is allocated among the assets in a way that favors you. You may be able to obtain considerable tax savings if the purchase price is allocated in a way that gives you the best possible tax results under federal and D.C. income tax laws, and other D.C. tax laws, such as sales/use tax, unincorporated business franchise tax, or property tax laws. Depending upon the state (or states) in which the seller's assets are located, you may also have to comply with state or D.C. bulk sale or bulk transfer laws. (Note: Maryland and Virginia are among the few states that have still have bulk sales laws.) You should also obtain tax releases from various state taxing agencies, as discussed below. (b) Bulk Sale Laws. Typical bulk sale laws require either publication of legal notices to all creditors in advance of the sale and recording of such notices in some cases, or maintenance of detailed lists of the property to be transferred, for inspection by the public. The District of Columbia is one of the few jurisdictions that still has a bulk sale law and you will need to comply with this law when you purchase assets of an existing business. Failure to do so will expose you to liability to any creditors of the seller who do not get paid off when the sale of the business occurs. The D. C. bulk sale law closely follows the bulk transfer provisions of the Uniform Commercial Code. The basic requirements, when purchasing the assets of business in a bulk sale, are as follows:
In certain bulk sales, where the number of persons to be notified is 200 or more, you may be able to satisfy the above notice requirement by filing a notice of the bulk transfer with the office of the mayor. Compliance with the bulk sales law should be handled by a competent business attorney, as its requirements are quite specific and very technical in nature. Acquiring an existing business is a very complex matter and doing so without the assistance of legal counsel is roughly the equivalent of do-it-yourself brain surgery, and should not be attempted, in this author's opinion. (c) Tax Releases. When you acquire an existing business, you will want to make sure that you do not unwittingly become liable for any unpaid taxes owed by the seller. Typically, to protect yourself, you will need to receive a tax release or releases from various state taxing agencies, for such taxes as sales and use tax, income tax withholding, and state unemployment taxes, in each state in which the seller does business. If you fail to obtain such a release or written statement from the tax agency that the seller is not delinquent on any tax payments, you will be held responsible for such tax if it is not withheld from the purchase price proceeds and paid to the state (or District of Columbia) tax agency at the time the sale of the business transpires. In the District of Columbia, you should obtain tax releases for D.C. unemployment taxes and for sales and use taxes. For unemployment taxes, notify the District of Columbia Department of Employment Services in advance of the sale, and they will either notify you that there are no unpaid unemployment taxes due from the seller, or the amount of such taxes that are owed and which you should withhold from the selling price. Similarly, you will want to contact the Office of Tax and Revenue regarding the seller's sales and use tax liabilities before closing the transaction, so that the Office of Tax and Revenue can notify you as to whether and how much sales and use tax liability of the seller must be withheld from the sales price. Note that the business purchase transaction itself may be subject to sales or use tax, in part, although there are major exemptions for items such as real estate, or where the sale is a "casual sale" or isolated sale by a vendor who is not regularly engaged in the business of making sales at retail. (d) Unemployment Tax Rating of Seller. In addition to obtaining tax releases, you may find it advantageous to succeed to the seller's unemployment tax experience rating, if the seller has a tax rate lower than you would otherwise obtain as a new business. While succeeding to a seller's experience rating is optional in many states, you will (usually) automatically be treated as a successor employer in the District of Columbia, if all or part of the seller's business is transferred to you, unless you already have an experience rating for your business, in which case your rate will be a blended rate, based on the respective sizes of the acquired unit's payroll and the payroll of your business prior to the acquisition of the other business (but your existing rate will continue to apply for the year in which you make the acquisition). PLANNING POINT: EXAMPLE: IV. DISTRICT OF COLUMBIA TAXES AND OTHER GENERAL REQUIREMENTS. (a) In General.
Tax rates in the District of Columbia are generally fairly high,
compared to most states, with top tax rates of nearly 10% for
for both corporate and unincorporated business franchise taxes,
and a top tax rate of 8.95% or higher on individuals.
On the other hand, sales and use tax rates are relatively low (6%),
and there is no property tax on intangible assets or on business
inventories. Government services in the District have been in a
state of disarray in recent years, and the federal government has
taken over much of the District's finances recently, and has had
some success in restoring normal functioning.
Legislation was adopted on December 29, 2004 that imposed
new taxes and fees to finance the building of a major league
baseball park in the District of Columbia. These include an
additional 4.25% sales tax on ticket sales and sales of tangible
personal property in connection with sporting events at the
new stadium, plus an annual "ballpark fee" ranging from $5,500
a year on all businesses with at least $5 million of District
gross receipts for the preceding year, to as much as $16,500
if such gross receipts are $16 million or more. The fee is due
and payable by June 15th each year and must be reported on
Form FR-1500.
For state tax forms and tax information, see the contact
information for the D.C. Office of Tax and Revenue
in Section VI(a).
(b) District of Columbia Licensing.
Nearly any business, operated anywhere in the United States,
will have to have at least one government license of some kind.
In most cases, this will be a local license, issued by your
city or county. Before you open your business in the District
of Columbia, contact the D.C. city government and find out if
your particular business needs one or more local licenses.
Most kinds of local business licenses are granted upon payment
of a fee, with no further requirements, except possibly for
annual or other periodic renewal fees.
However, if you are engaging in any kind of food business,
you will usually need to also obtain a health department
permit and show that you are in compliance with health
department food-handling requirements. In addition, be
sure to check with an attorney or local government zoning
or planning department officials to determine if your
business will be in compliance with all local zoning
and planning restrictions. If you own or rent any type
of facility, you will generally need fire department
permits, showing that you meet fire safety codes and any
construction or improvements to an existing structure
will usually require a building permit. If you intend
to simply operate your business from your home, you may
be in violation of local zoning requirements, but this
is less likely to be a concern if you don't have clients,
customers, suppliers, or employees coming to your house on
business, on a regular basis.
All state governments and D.C. have traditionally required
special licenses for many kinds of professionals, such as
physicians, dentists, lawyers, and accountants. To further
protect consumers, the District of Columbia has expanded the
list of occupations that must be specially licensed by the
District to include many other occupations. Most such special
licenses not only require payment of fees, but are only issued
for a given profession or occupation upon showing that you have
completed certain educational or experience requirements, or
passed certain tests, or some combination of the foregoing.
Legislation in 1999 completely revised the framework
of regulation of non-medical occupations and businesses.
A partial list of business, occupations, and professions
requiring special licenses in the District of Columbia
include:
In addition to special licenses or the above partial list of
businesses and professions, beginning December 31, 2008, the
District of Columbia began requiring all businesses that pay
business taxes to have a valid District of Columbia Basic
Business License (BBL). However, various professions like
attorneys, Certified Public Accountants, architects, barbers,
most types of medical professionals, realtors, insurance agents,
and a number of other highly regulated professions or occupations
are exempt from obtaining a BBL. The initial fees to obtain a
BBL from the Department of Consumer and Regulatory Affairs varies,
according to the type of business and the annual license renewal
fee is $200 ($400 paid biennially, or $500 biennially for a
general contractor/construction manager license).
Licenses must be renewed every two years.
For help with D.C. licensing and business registration
requirements, see the contact information for the offices
of the Department of Consumer and Regulatory Affairs,
listed in Section VI(a). See their
web site (Section VI(c)) for a list
of the various types of businesses that are not required
to have a Basic Business License.
(c) Income and Franchise Taxes. The District of Columbia has both an individual income tax and a corporate income (franchise) tax and also imposes a business franchise tax (an income tax) on all but the very smallest unincorporated businesses. TAXATION OF SOLE PROPRIETORS AND PARTNERSHIPS The District of Columbia individual income tax is imposed at a maximum tax rate of 8.95% for the years 2012-2016, and the business franchise tax on both corporations and unincorporated businesses, which is imposed at a rate of 9.975%, generally. Individual taxpayers generally pay D.C. unincorporated business franchise tax on their business earnings from a sole proprietorship, or on their share of the earnings of a pass-through entity, such as a partnership or LLC. They do not have to also pay individual income tax on income that is subject to the unincorporated business franchise tax. The unincorporated business franchise tax is generally imposed at a flat rate of 9.975% on the business income from D.C. sources of most unincorporated businesses, including sole proprietorships, partnerships, and LLC's. An annual minimum tax of $250 applies to each such business ($1,000 for a business with over $1 million of gross receipts within the District). Deductions are allowed for salaries paid to owners or members who are actively engaged in the conduct of the business, but such deductions may not exceed 30% of the net income computed before such deduction. Each unincorporated business is given an annual $5,000 exemption deduction, which is reduced on a pro-rated basis for a short tax year. The franchise tax law exempts certain businesses:
Unincorporated businesses with over $12,000 of of gross receipts that are not exempted are required to file an unincorporated business franchise tax return each year by April 15th of the following year, in the case of a calendar year taxpayer, on Form D-30, Unincorporated Business Franchise Tax Return. Quarterly estimated tax payments are required if the estimated franchise tax for the year is more than $1,000, with payments due on the 15th day of the 4th, 6th, 9th, and 12th months of the taxable year, on Form D-30ES. Tax returns and payments must be filed with the District of Columbia Office of Tax and Revenue. At least 90% of the current year's tax or, if less, 110% of the prior year's tax, must be paid in as estimated tax. In the case of partnerships that are subject to the unincorporated business tax, the partners are liable for the tax in their individual capacities. Members of LLC's are similarly treated, since LLC's are generally treated as partnerships if so treated under federal law, and thus are also liable for the franchise tax on LLC profits in their individual capacities. UPDATE NOTE: The District of Columbia personal income tax return is Form D-40, which must also be filed with the Office of Tax and Revenue by the 15th day of April, for the preceding calendar year. Any business income from sole proprietorships or from pass-through entities, such as partnerships or LLC's, that is not subject to the franchise tax, must be reported on your individual D.C. income tax return instead. This would include, for example, income from sources outside the District, which is not subject to the franchise tax. Partnerships, or entities taxable as partnerships, such as LLC's, which have income that is not subject to the D.C. unincorporated business franchise tax, must file an information return with the Office of Tax and Revenue each year, showing each partner's (or LLC member's) share of taxable income, losses, and credits, on Form D-65. The D.C. personal income tax is imposed at the following rates in 2013 (and until 2016, when the top rate may drop back to 8.5%, if certain budget goals are met): 4.0% on the first $10,000 of taxable income Individual taxpayers are required to make payments of estimated District of Columbia individual income taxes, on Form D-40ES, if their net tax liability (not covered by withholding) exceeds $100. Estimated tax payments are due in four installments, on the 15th day of the 4th, 6th, and 9th months of the taxable year, and the 15th day of the first month of the following year. To avoid penalties, either 90% of the current year's tax or 110% of the prior year's tax must be paid in as estimated tax payments. Note that you may also be required to make estimated franchise tax payments on business income for purposes of the D.C. unincorporated business franchise tax, to the extent your business has income from D.C. sources, but you will not have to make individual estimated income tax payments on that same income. Recent (2007) federal tax legislation now allows a business owned solely by a married couple to elect to be treated as a "qualified joint venture" rather than as a partnership, for federal tax purposes, so that each spouse reports his or her share of the business income or loss like a sole proprietor on a Schedule C of their joint Form 1040, rather than filing a partnership tax return. See Chapter 14.12 of this publication for more details on "qualified joint ventures." The District of Columbia corporate franchise tax rate, on corporations, including S corporations, was imposed at a flat rate of 9.975% of taxable income in 2004 and 2005. As noted above, this rate was slated to gradually drop to 8.5% by 2004, if the District met certain fiscal budgetary targets. However, the tax rate will be 9.975% again for 2013, as in each recent year. There is a $250 minimum tax, or $1,000 if a corporation has District gross receipts exceeding $1 million. The D.C. corporation franchise tax return is Form D-20, which must be filed with the Office of Tax and Revenue by the 15th day of the third month following the end of the taxable year, or by March 15th in the case of a corporation whose taxable year is the calendar year. Corporations are required to make estimated tax payments of their District of Columbia corporate income tax in advance, if their tax liability for the year exceeds $1,000. Estimated tax payments are due in advance, in four equal installments, on the 15th day of the 4th, 6th, 9th, and 12th months of the taxable year, payable with Form D-20ES. The total estimated tax that must be paid in is usually equal to 90% of the actual tax liability for the year. However, if the preceding year was a full year of 12 months, the current year payments need only be equal to 110% of the prior year's tax liability, if less, if the prior tax year was a full 12 months. If corporate franchise tax payments, including quarterly estimated tax payments, exceed $5,000 or more, the corporation must make payments electronically. Penalties will be imposed for failure to make the required estimated tax payments on a timely basis. S corporations are taxed in the same manner as other corporations in the District of Columbia, at the same 9.975% tax rate on taxable income. Any income that is taxed at the corporate level is not taxable to the individual shareholder under the D.C. personal income tax. However, income of an S corporation that is not taxed at the corporate level, such as income from sources outside the District, passes through and is taxable to the individual shareholder who is a D.C. resident. TAXATION OF LIMITED LIABILITY COMPANIES In the District of Columbia, a limited liability company (LLC) will generally be subject to the unincorporated business franchise tax, but its income that is subject to the franchise tax will not be taxed again by the District on the LLC owners' individual D.C. income tax returns. Thus, an LLC will generally avoid the possible double taxation of income that can occur with a corporation, except in cases where the LLC has elected to be taxed as a corporation for federal income tax purposes. Under the unincorporated business franchise tax, an LLC will pay the same flat rate of tax on its income as corporations or other unincorporated businesses, generally 9.975%. Note that under IRS regulations, an LLC will generally be treated as a partnership if it has more than one owner, or as a sole proprietorship if it does not, for federal income tax purposes. Until a few years ago, the District of Columbia was one of the last jurisdictions that did not recognize the validity of single-member LLC's, but legislation went into effect on June 24, 2000, permitting the formation of single-member LLC's. Note that it is not always entirely clear whether an LLC is a "single-member LLC" or not, where the "single owner" is a married couple who hold the entire ownership of the LLC in some form of co-tenancy, such as joint tenants with right of survivorship, tenants by the entirety, or as tenants in common. The federal Internal Revenue Service (IRS) has taken a very lenient position in Rev. Proc. 2002-69, where a couple hold the LLC interest as community property, ruling that the IRS will accept whatever choice the couple make, either to disregard the LLC as an entity (treating it as a "single-member LLC") or to treat it as a partnership between the husband and wife. However, the District of Columbia does not have a community property regime of marital property laws, so where the LLC is owned by a husband and wife in some form of co-tenancy, it is unclear whether the IRS treatment would be as lenient as for community property owners, since the IRS has not yet issued any published rulings on whether an LLC can be a disregarded entity if held in one of the various forms of co-tenancy by a married couple, rather than being held as community property. Thus, it is also unclear, where an LLC is owned by a husband and wife as co-tenants, whether the District of Columbia would treat the LLC as a single-member LLC or as a partnership. (d) Sales and Use Tax. The District of Columbia imposes a general sales tax on retail sales of tangible personal property and certain types of services at the general rate of 6%. In addition, there are additional special sales tax rates that apply to transient accommodations or to prepared food and drink, alcoholic drinks, for parking, or for rental vehicles and trailers. UPDATE NOTE: Under legislation adopted December 29, 2004, an additional 4.25% sales tax applies to ticket sales and sales of tangible personal property at sporting events at the new major league baseball stadium that is to be constructed in the District, in order to finance the new stadium. However, the new sales tax does not apply to food or beverage sales for immediate consumption, or parking at such events. Also, with respect to sales of taxable services or tangible personal property at RFK stadium, the 4.25% sales tax applies only to professional baseball games or baseball-related events. There are numerous exemptions from the sales tax, the most important of which is the resale exemption. If you are a wholesaler or retailer who purchases goods that you will resell, your purchase of such goods may qualify as an exempt sale for resale. Similarly, if you sell goods to wholesalers or retailers for resale by them, your sale may also qualify as an exempt sale for resale. In any such transaction, the exemption is ordinarily available only if the purchaser gives the seller a valid resale certificate, certifying that the items are being purchased for resale, and not for use or consumption by the buyer. A shadow tax, the use tax, is also imposed at the same rate as the sales tax. It is primarily intended to tax property that is acquired from sources outside of the District, in transactions not subject to sales tax, when such property is used or consumed within the District of Columbia. Use tax may also apply to items purchased on an exempt basis, such as for resale, if such items end up being used or consumed, instead of being resold. Before making any taxable sales, you will need to register with the Office of Tax and Revenue on Form FR-500, Combined Registration Application, which is also used for D.C. unemployment tax and employer registration. There is no registration fee. For more information on District of Columbia sales and use tax registration and compliance, see contact information for the offices of the Office of Tax and Revenue in Section VI(a). (e) Real and Personal Property Taxes. In the District of Columbia, as in all other parts of the United States, any business real estate you own will be subject to real property taxes. In general, there is little that you must do, unless you wish to challenge your assessed valuation, since the assessor will bill you for each year's real property taxes as they come due. Real estate taxes are due in two installments each year, by March 15th and September 15th. The tax rate for commercial and industrial real estate was $1.65 per $100 valuation for the first $3 million of assessed value, or $1.85 per $100 for assessed value more than $3 million, for tax year 2013 (beginning October 1, 2012). Administration of property taxes in the District of Columbia differs from that in most other parts of the nation, in that there is only one governmental body, the D.C. government, rather than a multitude of city, county and special tax districts, involved in the administration and collection of the taxes. The District of Columbia also imposes personal property taxes on tangible personal property. ("Personal property" is any kind of property that is not real estate.) Personal property tax returns must be filed in July with the Office of Tax and Revenue. However, certain business personal property, such as business inventories, are exempt from personal property tax in the District of Columbia. Also, the first $225,000 of "remaining value" of personal property of a business is exempt from personal property tax, which relieves many small businesses from paying personal property tax, but not from filing personal property tax returns. The tax rate is 3.4% on taxable personal property in excess of $225,000 in assessed value. Business taxpayers must report personal property taxes on Form FP-31, Personal Property Tax Return, by each July 31st, for the year ended on the preceding June 30th. An three-month extension of the time for filing may be obtained on or before July 31 by paying the tax due and filing Form FP-129A with the Office of Tax and Revenue. While the District of Columbia generally taxes tangible personal property, it does not impose a property tax on intangible personal property, such as stocks, bonds, promissory notes, and other such paper assets. (f) Other Business Taxes. The District of Columbia imposes a number of excise and other taxes on businesses, some of which may affect you. These include:
(g) Trade Names. A trade name, also known as a fictitious or assumed name, is any name used in the course of business that does not include the actual legal names of all the owners of the business. Thus, if your business goes by any name other than your own real name, it is operating under a trade name. The same is true of a corporation, if it operates under a name other than its legal name. A trade name might also be one that suggests the existence of additional owners, by using such words as "company," "associates," or "group." In most states where you do business, it will be necessary to register a trade, fictitious, or assumed name, so that people who do business with you can find out who the actual owners of your business are. You may also want to register any such trade name, as a means of protecting against other companies usurping that particular trade name. There was formerly no law in the District of Columbia that required registration of fictitious or assumed business names. However, the enactment of the DC Omnibus Law 20-212 requires individuals or entities to register trade names (fictitious business names) with the Department of Consumer and Regulatory Affairs. There is a $55 fee to register a trade name or to renew a registration. V. EMPLOYER REQUIREMENTS IF YOU HAVE EMPLOYEES (a) Employer Registration and Withholding. If you have any employees, you will already be withholding federal income tax and FICA taxes from their wages. Because the District of Columbia imposes a District income tax on the income of individuals, you will need to also withhold District of Columbia income tax from the wages of your employees. Before you begin to pay wages, you must register as an employer with the D.C. Office of Tax and Revenue, on Form FR-500, Combined Registration Application. There is no fee to register as an employer. IMPORTANT NOTE: For more information on District of Columbia income tax withholding and registration requirements for employers, see the contact information for the offices of the Office of Tax and Revenue, listed in Section VI(a). (b) Unemployment and Other District Payroll Taxes. If your business has one or more employees in the District of Columbia, you, as an employer, will be required to pay D.C. unemployment tax based on the amount of such wages paid. It does not matter whether the employee is full-time or part-time. Employers subject to the District of Columbia unemployment tax are required to register with the Department of Employment Services on Form FR-500, Combined Registration Application, and to obtain a six-digit employer tax identification number for D.C. unemployment tax purposes. There is no fee to register. New employers are required to pay tax at rate that varies from year to year on the first $9,000 of wages paid to each employee. For 2013, the rate is 2.7% of taxable wages. The rate is set each year as the average rate paid by all employers during the preceding year, or 2.7%, whichever is higher. As of this writing, March 26, 2013, the 2013 rate had not yet been announced. Assuming no change from 2012, the maximum tax an employer would owe on the first $9,000 of wages paid to an employee would be $243.00. After you have had employees for 4 to 5 years, you will develop an unemployment tax experience rating. This rating is based on the number of employees you terminate who then claim unemployment benefits and the amount of such benefits paid to those former employees, under complex formulas. The Department of Employment Services will inform you when they have assigned you an individual tax rate based on your firm's experience rating. That rate may be higher or, if you have had relatively few benefit claims charged to your account, lower than the standard new employer tax rate you initially were paying. All D.C. unemployment taxes are imposed upon you as the employer, and, under District of Columbia law, cannot be charged to your employees or withheld from their wages. For more information on your District of Columbia unemployment tax obligations as an employer, and to obtain an unemployment compensation notice you must post in the workplace if you are subject to unemployment tax, see the contact information for the offices of the Department of Employment Services, listed in Section VI(a). (c) Workers' Compensation. In the District of Columbia, virtually all businesses with one or more employees are required by law to have workers' compensation insurance, except those able to self-insure. Note, however, that a sole proprietor or a partner in a partnership is generally not considered an employee. Also, licensed real estate salespersons and real estate brokers do not have to be covered. Workers' compensation provides wage loss and medical benefits to employees injured on the job and it protects you, as an employer, from legal action for damages for injuries or job-related illnesses suffered by your employees. In effect, it is a "no-fault" insurance system for work-related injuries or illnesses. CAUTION: Be aware that neither general liability nor health and accident insurance can properly substitute for workers' compensation insurance. As an employer, you must notify injured employees of their benefits and post a notice in the workplace informing your employees of their workers' compensation coverage. For more detailed information regarding your obligations as an employer under the District of Columbia workers' compensation laws, contact your insurance carrier or see the contact information for the Office of Workers' Compensation, Department of Employment Services, listed in Section VI(a). (d) District Wage and Hour Laws. Some employees of certain small firms not engaged in interstate commerce are not covered by the federal minimum wage and overtime laws. However, even if few or none of your employees are covered by the federal wage-hour laws, if, for example, because your firm does less than $500,000 a year in gross sales and the employees in question are not deemed to "...engage in (interstate) commerce...," they will still generally be subject to the District of Columbia wage-hour laws, which provide for a District minimum hourly wage that is always at least $1.00 higher than the federal minimum wage ($8.25 since July 24, 2009, since the federal minimum is $7.25). The D.C. minimum wage law provides that new hires who are 18 years of age or older can be paid at the federal minimum wage rate during their first 90 days of employment, and individuals under the age of 18 may also be paid at the federal minimum wage rate (currently $7.25 an hour). UPDATE NOTE: The $12.50 living wage is (supposedly) adjusted annually for inflation, with the new living wage rate to be announced by March 1 of each year. Exemptions from the Living Wage Act are provided for employees under 22 years of age employed during a school vacation period, or enrolled as a full-time student who works less than 25 hours a week (provided that other employees are not replaced). D.C. labor laws also require employers to pay employees who work overtime hours in excess of 40 hours a week at time-and-a-half for the overtime hours worked. Certain retail and service establishments are exempt from this requirement with respect to employees who are paid at least the D.C. minimum wage and if more than half the employee's compensation in a typical period consists of commissions on goods or services. Note that, as under federal wage-hour laws, certain classes of executive, administrative, and professional employees are exempted from the District of Columbia wage-hour rules. Besides the federal wage-hour posters that you must display in the workplace, you must also display a D.C. wage-hour poster and the Living Wage poster, both of which you can obtain from the Wage-Hour Office, Office of Labor Standards, of the Department of Employment Services. To obtain posters and more information on employer responsibilities under the wage/hour laws in the District of Columbia, see the contact information for the Department of Employment Services in Section VI(a). In addition to wage-hour laws, most businesses are subject to federal child labor laws, which put numerous restrictions on the working hours and kinds of work in which minors under the age of 18 may engage. Your business must also be cognizant of similar D.C. child labor laws, in the District of Columbia. The D.C. child labor law has the following main features:
Before any minor under age 18 can be hired for any job, except housework or agricultural labor, a work permit must be obtained from the Board of Education. The D.C. child labor law limits the hours that children may work:
Employers are required to post a notice regarding the D.C. child labor laws in the workplace, which can be obtained from the District of Columbia Public Schools (see contact information in Section VI(a)). (e) District Occupational Safety and Health Laws. Approximately half of the states have their own OSHA-like agency, charged with administering the state's own occupational safety and health laws. The remaining states have no such enforcement agency, and thus rely instead on the federal Occupational Safety and Health Administration (OSHA) to administer the federal job safety rules within such states. The District of Columbia does not have its own enforcement agency, and thus primarily relies on federal OSHA to administer job safety laws and regulations within the District. Note that while you may obtain a free safety consultation from federal OSHA experts, they must and will cite you for any violations they discover at your workplace. This is not the case with state (or D.C.) safety inspections. If you request a safety consultation from the Office of Occupational Safety and Health of the D.C. Department of Employment Services and they detect violations, they will not cite you if you promptly correct the unsafe conditions. For more information on your job safety and health obligations as a D.C. employer, required posters, and possible on-site safety consultations, see the contact information for the Office of Occupational Safety and Health, Department of Employment Services, listed in Section VI(a). (f) Other Miscellaneous District Labor Laws. Other District of Columbia labor laws of which you need to be aware, as an employer, include the following: (1) Wage payments to terminated employees. Employers in the District of Columbia are required to have regular paydays and to pay wages at least twice a month on such paydays. An interval of no more than 10 working days may elapse between the end of the pay period covered and the regular payday designated by the employer. An employee who is terminated by an employer must, in most cases, be paid his or her final wages by the next working day after termination. However, where the employee is responsible for money belonging to the employer, the employer is allowed a period of 4 days from the date of discharge in which to determine the accuracy of the employee's accounts, before the final wage payment must be made. When an employee voluntarily quits or resigns, the employer must pay the final wages on the next regular payday or within 7 days from the date of resignation or quitting, whichever is earlier. The law provides for damages to be paid to the employee if an employer fails to pay the final wages when required, in the amount of 10% of the unpaid wages per day of late payment, up to a maximum of 100% of the late-paid wages. Where there is a bona fide dispute between an employer and a terminated employee over the amount of wages due, the employer must provide a written statement of the amount of wages it concedes is owed to the former employee, and pay that amount within the time frame described in the preceding paragraphs. Acceptance of that payment by the employee does not constitute a release of his or her claim for the amount that remains in dispute. For more information on employer responsibilities in the District of Columbia, see the contact information for the Department of Employment Services in Section VI(a). (2) Right-to-work laws. About half the states have enacted "right-to-work" laws, which guarantee that no person may be denied employment for refusing to join a union or for not paying union dues, thus banning either "union shop" or "agency shop" agreements, or both. In a union shop, an employee not belonging to a union may be hired but then must join the union, usually within 30 days. In an agency shop, an employee need not join the union but, to remain employed, must pay union dues. The District of Columbia does not have such a right-to-work law and thus allows union shop or agency shop contracts between an employer and a union. (3) District anti-discrimination laws. In addition to complying with federal anti-discrimination laws, employers must also be aware of and comply with District civil rights laws in the District of Columbia, and display a poster informing employees of their rights. You can obtain this poster from the D.C. Office of Human Rights, at the address listed in Section VI(a). The District's human rights law prohibits discrimination in employment on account of any of the following:
Under the D.C. law, sex discrimination includes discrimination based on pregnancy, childbirth, related medical conditions, or breastfeeding. The District of Columbia has enacted a domestic partner law, which allows two persons who live together to register as domestic partners, in which case they will be entitled to the same treatment as married couples for purposes of health benefits. A domestic partnership terminates by operation of law if the domestic partners marry each other, as is now permitted for same-sex couples (see below). UPDATE NOTE: (4) Reporting new hires. Under federal welfare reform laws, employers in all states, as well as the District of Columbia, now have to report newly-hired (or rehired) employees to a designated state agency (the District of Columbia Directory of New Hires for D.C. employers) within 20 days after the date of hire. Reports can be filed on a federal tax Form W-4 or an equivalent form, at the option of the employer. See the contact information in Section VI(a) for the address and fax number to which you can mail or fax your new hire reports, or see the new hire reporting Internet address, where you can file reports online, at Section VI(c). An employer that transmits reports to the District of Columbia Directory of New Hires magnetically or electronically must transmit reports in two monthly transmissions (if needed), which must be not less than 12 days nor more than 16 days apart. (5) Family and Parental Leave Laws. The District of Columbia has enacted its own Family and Medical Leave Act, similar to the federal law, except that the D.C. law applies to employers with as few as 20 employees employed in the District. Under the D.C. Family and Medical Leave law, any employee of a covered employer who has worked at least 1,000 hours in the preceding 12 months without a break in service is entitled to take up to 16 work weeks of unpaid family or medical leave in any 24-month period. Leave is to be allowed for:
The District of Columbia has also enacted a Parental Leave act, which gives an employee the right to take up to 24 hours leave in any 12-month period to attend school-related events of a school which any child of the employee attends, and may take a full day of leave on April 16th, District of Columbia Emancipation Day. This requirement applies to employers of any size. However, employers may deny a parental leave request if granting such leave would disrupt the employer's business and make the achievement of production or service delivery unusually difficult. Any such parental leave is without pay, unless the employee elects to use vacation or other paid leave he or she has accrued under another paid leave program of the employer. Covered employers are required to post in the workplace a D.C. Family Leave Act poster and parental leave notice, obtainable from the D.C. Office of Human Rights, at the address listed in Section VI(a). Employees who take leave under the District of Columbia Family and Medical Leave Act are not entitled to paid leave. However, if an employer provides for paid leave, they may use such paid leave as part of their family or medical leave. However, under a new (2008) paid leave law, employers are now required to provide some paid leave to employees, based on the employer's average monthly number of full-time employees during the previous calendar year:
Employees who are exempt from overtime pay under federal law may not accrue paid leave for overtime hours worked in excess of 40 hours per week. (6) Lie Detector Tests Prohibited. District of Columbia law generally prohibits employers from requiring any employee or job applicant to submit to a polygraph (lie detector) test or similar lie detection test as a condition for obtaining employment or continuing in employment. Unlike the lie detector test prohibitions under federal law or under most states' laws, the D. C. law makes no exceptions for any types of businesses. VI. DISTRICT OF COLUMBIA SOURCES OF HELP AND INFORMATION (a) Key District Agencies Contact Information. The District of Columbia has set up a "one-stop" center to help new or existing businesses to obtain all necessary D.C. licenses and permits from a single office, without your having to go from agency to agency to meet all the legal and regulatory licensing requirements. You can register your business with the District for D.C. income tax, sales and use tax, employer withholding, and D.C. unemployment tax, on a single application form, the Combined Registration Application, Form FR-500. There is no registration fee. To obtain business registration forms and information on starting or relocating your business in the District of Columbia, contact: Department of Consumer and Regulatory Affairs Addresses and other contact information for other key D.C. government agencies mentioned in this book are listed below for your convenience. CITYWIDE CALL CENTER. To reach a District of Columbia government agency or office not listed here, simply dial 311 from within the district, or call (202) 727-1000 otherwise. DEPARTMENT OF CONSUMER AND REGULATORY AFFAIRS. In the District of Columbia, the Department of Consumer and Regulatory Affairs fulfills the role that is typically handled by the secretary of state's office in most states, including:
Department of Consumer and Regulatory Affairs TAXES. Obtain D.C. income tax, unincorporated business franchise tax, sales and use tax, and other miscellaneous business tax forms, instructions and information from the District of Columbia Office of Tax and Revenue, which is the main tax collection agency in the District of Columbia. You can also register with this agency as an employer, for D.C. income tax withholding purposes, and for unemployment tax purposes, on Form FR-500, Combined Registration Application. There is no fee to register. D.C. Office of Tax and Revenue D.C. LABOR LAWS. Contact the Department of Employment Services about your obligations as an employer under various D.C. labor laws, including:
D.C. Department of Employment Services To obtain required child labor posters if you employ minors, contact: D.C. Public Schools D.C. LICENSES. The following agency is the main District of Columbia licensing agency. Register with this D.C. agency for various occupational and professional business licenses or Basic Business License, at: Business and Professional Licensing Administration D.C. SALES TAX. Obtain your sales and use tax license or permit and information on the District of Columbia sales and use tax law, from the Office of Tax and Revenue, at the address listed above for that agency. EMPLOYER WITHHOLDING. Contact the D.C. Office of Tax and Revenue to register as an employer, for purposes of District of Columbia income tax withholding. See the address listing for the Office of Tax and Revenue above. D.C. UNEMPLOYMENT TAX. Contact the following D.C. agency to determine whether you are an employer subject to payment of District of Columbia unemployment taxes, and for registration as an employer if you are subject. D.C. Department of Employment Services WORKERS' COMPENSATION INSURANCE. If you employ workers for whom you must supply workers' compensation coverage, contact the following agency for further information: Office of Worker's Compensation D.C. OSHA PROGRAM. There is no District OSHA enforcement program in the District of Columbia. The federal government provides federal OSHA enforcement instead. For required posters and information on federal occupational safety and health laws that affect you as an employer in the District of Columbia, contact: U.S. Department of Labor/OSHA Or, for a free OSHA consultation at your workplace, contact: DC Department of Employment Services D.C. ANTI-DISCRIMINATION LAWS. Contact the following D.C. agency for more detailed information on District of Columbia civil rights laws, including the D.C. Human Rights Act of 1997, that may apply to your business, and to obtain anti-discrimination notices and family leave/parental leave notices you are required to post in the workplace: Office of Human Rights NEW HIRE REPORTING. Report new hires (or rehires) to the following agency (and yes, that is a Texas address): The District of Columbia New Hire Registry (b) Small Business Development Centers. A number of Small Business Development Centers (SBDCs) are located throughout the District of Columbia to assist you. These centers, usually located on college campuses, provide a wealth of start-up information and sponsor frequent business-oriented seminars. Contact the lead office below for information, or for the location of other SBDCs nearer to you. Darrell Brown, Executive Director (c) Internet Sites. For anyone with access to the Internet, there is a wealth of state and even local business information provided by state and local governments. All of the states and D.C. now have a government home page on the Internet where you can obtain useful small business information on matters such as state (or D.C.) taxes, financing sources, or, for D.C., the addresses and phone numbers (or e-mail addresses) of various D.C. and federal agencies' offices in the District of Columbia. A number of the major D.C. agencies maintain their own Web pages, which you can usually access via links from the main D.C. web page. All of the website URL's listed below are currently working as of the date of this publication's release, in our annual update. However, since we find that many state government agencies change their website URL's frequently, you may find that some of these URL's are no longer working when you click on them. In that case, you might need to search for that particular state agency's websites by using one of the popular Internet search engines, such as Google, Bing, or Yahoo. To start your Internet search for District of Columbia government information, you may want to begin with the following Internet sites: District of Columbia home page (links to major District agencies, but little more than a mission statement and address information for some agencies): Office of Tax and Revenue (D.C. tax information and forms): List of District government agencies and their websites: Department of Consumer and Regulatory Affairs (incorporation, filing of documents for LLC's, LLP's, or limited partnerships): Department of Employment Services (unemployment tax, wage and hour laws and other labor standards, and workers' compensation): DC Employer New Hire Reporting (web site with information on where and how to file new hire reports, online or by mail or fax): (d) Financing Sources. For information and help on locating financing for your small business, contact the U.S. Small Business Administration District Office for the District of Columbia. The address of the SBA District Office in the District of Columbia is: U.S. Small Business Administration |
Copyright © 2013 Michael D. Jenkins
|