The District of Columbia Mayor Muriel Bowser allowed to become law, without her signature, emergency legislation, B26-0457 (the law), that decouples from select federal tax changes made by the "One Big Beautiful Bill Act" (OBBBA, PL 119-21).¹ As emergency legislation, B26-0457 will be effective for a 90-day period, expiring on March 3, 2026.

Provisions of the law apply as of January 1, 2025, unless otherwise provided.

Business income tax provisions

The law modifies the gross income of a corporation, financial institution, unincorporated business and partnership (each an "entity"). An entity is allowed to deduct all ordinary and necessary expenses paid or incurred during the tax year that are deductible under Internal Revenue Code (IRC) Section 162(a), except as follows:

• IRC Section 174A — For tax years beginning after December 31, 2021, the domestic research and experimental (R&E) expenditure deduction under IRC Section 174A is: (i) charged to the capital account, and (ii) allowed as an amortized deduction ratably over the five-year period beginning with the midpoint of the tax year in which these expenditures are paid or incurred. Taxpayers are not allowed to make an election: (1) to file an amended return "pursuant to [IRC Section] 174A(f)(1)" and (2) under "[IRC Section] 174A(f)2)"
• EY observes: While IRC Section 174A(f) does not exist, these elections are allowed under Sections 70302(f)(1) and (f)(2) of the OBBBA. Under Section 70302(f)(1) of the OBBBA, small businesses can elect to apply IRC Section 174A retroactively to domestic R&E expenditures incurred in tax years beginning after December 31, 2021. Under Sections 70302(f)(2) of the OBBBA, all taxpayers can elect to accelerate certain unamortized domestic R&E expenditures (those incurred and capitalized in tax years beginning after December 31, 2021, and before January 1, 2025) over one or two years (the first year, or first and second years, beginning after December 31, 2024).
• IRC Section 163(j) — In calculating the business interest limitation under IRC Section 163, adjusted taxable income is determined under IRC Section 163(j)(8)(A) except that IRC Section 163(j)(8)(A)(v) does not apply. In addition, "floor plan financing interest" under IRC Section 163(j)(9) does not apply.
• IRC Section 168(k) — Disallows the special depreciation allowance under IRC Section 168(k).
• IRC Section 168(n) — Disallows the special depreciation allowance under IRC Section 168(n).
• IRC Section 179 — Allows a deduction for the cost of property which the taxpayer has elected to be treated as not chargeable to capital account under IRC Section 179. The deduction is limited to the lesser of $25,000 or the actual cost of the property for the year in which it was placed in service.
• IRC Section 1400Z — Provides for the criteria that must be met for amounts invested in a qualified opportunity fund (QOF) after December 31, 2026, to realize:
• Reduced capital gains tax liability through a 10% step-up in basis, if invested in a QOF for five years, pursuant to IRC Section 1400Z-2(b)
• Abatement of capital gains tax on an investment of capital gains held in a QOF for at least 10 years, pursuant to IRC Section 1400Z-2(c)

The law may allow for a depreciation deduction for an investor in a shared equity financing agreement under D.C. Code Section 47-3507. The bill also modifies D.C. Code Section 47-1811.04 "Bases — Determination of depreciation deduction," to provide that no adjustments will be made for the amount of special depreciation allowance under IRC Section 168(n) and that a depreciation deduction may be allowed for an investor in a shared equity financing agreement under D.C. Code Section 47-3507.

Individual income tax provisions

For individual income tax purposes, the law modifies the standard deduction. Instead of providing the same amount as the federal standard deduction, the District sets the amount. For tax years ending December 31, 2025, the deduction is: (1) $15,000 for single individuals or married individuals filing separately; (2) $22,500 for head of households; and (3) $30,000 for married individuals filing a joint return or surviving spouses. For years after 2025, the standard deduction will be adjusted annually to account for changes in the cost-of-living.

For tax years beginning after December 31, 2024, individuals, estates and trusts must include any income or gain excluded from federal gross income under IRC Section 1202(a) (i.e., the qualified small business stock exclusion).

The law repeals certain individual, estate and trust tax provisions related to deductions under D.C. Code Sections 47-1803.03² and creates a new D.C. Code Section 47-1803.04 to specify which individual, estate and trust deductions are allowed and those that are not. The deduction for capital gains from a QOF are allowed. Deductions that are not allowed include but are not limited to: (1) qualified business income under IRC Sections 63(b)(3) or 199A, (2) qualified tips under IRC Section 224, (3) qualified overtime compensation under IRC Section 225, and (4) personal car loan interest under IRC Section 163(h)(4).

The law also amends provisions related to nonresidents filing and creates a child tax credit.

Implications

A temporary bill (B26-0458) including the same provisions as the emergency bill was approved by the District of Columbia City Council on December 2, 2025. The temporary bill will next go to the mayor for her consideration and, after it is approved, it will be sent to the US Congress for a mandatory 30-in session day review period. If enacted, it would be effective for 225 days. It is likely that these law changes will also be introduced as part of a permanent bill (i.e., a bill that goes through the full legislative process with no expiration date).

The Fiscal Impact Statement released by the District Office of the Budget Director estimates the legislative changes in the temporary bill as introduced would result in the collection of an additional $593 million in revenue over four years. Taxpayers should consider the impact these legislative changes will have on their District of Columbia tax liabilities, including estimated tax payments for 2025.

The District joins other states, including Colorado, Delaware, Michigan, Pennsylvania and Rhode Island, that have decoupled from federal tax changes enacted under the OBBBA. While additional state and local jurisdictions may consider OBBBA decoupling legislation this year — a bill is also being considering in Illinois (SB 1911, sent to the governor) — most states are likely to wait until regular sessions in 2026 to consider substantive legislative responses.