15 September 2026 District of Columbia budget bill decouples from select OBBBA provisions, delays sales and use tax rate increase, increases hotel and car rental tax rates, requires BAT study
District of Columbia Mayor, Muriel Bowser, has let emergency legislation (B26-0724 (the law)) implementing the District's Fiscal Year 2027 Budget become law without her signature.
As emergency legislation, B26-0724 will be effective for a 90-day period, expiring on November 11, 2026. Corporate income tax changes generally apply as of January 1, 2025. Other tax changes take effect on October 1, 2026, unless otherwise provided. The law modifies the calculation for determining the gross income of corporations, financial institutions, unincorporated businesses and partnerships (each an "entity"). Under the law, 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:
The law continues to disallow the special depreciation allowance under IRC Section 168(k) and continues to allow a deduction for the cost of property the taxpayer has elected to be treated as not chargeable to capital account under IRC Section 179. The deduction, however, 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. For amounts invested in a qualified opportunity fund (QOF) after December 31, 2026, the law addresses how taxpayers may benefit from: (1) 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); and (2) 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. These changes generally apply as of January 1, 2025, except the provisions related to IRC Section 174 apply as of January 1, 2022. The law modifies the standard deduction, with the District setting the amount for individual income tax filers, rather than relying on the federal standard deduction. For tax years ending December 31, 2025, the deduction is:
For tax years beginning after December 31, 2025, but before January 1, 2030, the standard deduction will be the same amounts as provided for 2025, adjusted annually to account for changes in the cost-of-living. For tax years beginning after December 31, 2029, the standard deduction is the same as the federal standard deduction. For tax years beginning after December 31, 2024, and ending before January 1, 2026, 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), provided that the sale or exchange of the qualified small business stock occurred on or after December 31, 2025. 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. The law allows a deduction for capital gains from a QOF. Deductions for qualified tips under IRC Section 224, qualified overtime compensation under IRC Section 225 and personal car loan interest under IRC Section 163(h)(4) are allowed for tax years beginning after December 31, 2025 (deductions for these are not allowed for tax years beginning before January 1, 2026). Effective for tax years beginning after December 31, 2025, the law allows a nonrefundable credit against income tax on individuals, estates and trusts whose adjusted gross income includes a distributive share of net income from an unincorporated business or share in income of an S corporation. The credit is limited to the lesser of:
This credit only applies if the unincorporated business or corporation filed a franchise tax return for the year in which the credit is claimed and paid all tax due. In computing District gross income, the law requires a taxpayer that claims a credit for taxes paid to another state,3 territory or possession or political subdivision of the United States, to add back the taxpayer's distributive or pro rata share of any tax imposed on and paid by a pass-through entity to such jurisdiction. Add back is required to the extent the tax was deducted from the pass-through entity's gross income in determining its federal taxable income. This add back requirement applies to tax years beginning after December 31, 2025. The law requires the District CFO to study the feasibility of enacting a BAT. The report is due to the mayor and Council by January 31, 2027. The report must contain the following information:
For purposes of this study, BAT means "a tax on gross receipts of every business with a substantial nexus in the District, which shall be calculated by subtracting the sum of purchases from the other businesses, rent, and capital expenditures from gross receipts that exceed $200,000." The law delays the previously enacted sales and use tax rate increase from 6.0% to 7.0% that was set to take effect on October 1, 2026. The 6.0% rate will remain through September 30, 2027, and the 7.0% rate will begin on October 1, 2027. The law makes permanent the increase to the rate of the additional sales and use tax on gross receipts for transient lodgings or accommodations. A 2023 law temporarily increased the rate from 0.3% to 1.3%, which was set to sunset on September 30, 2027. The bill repeals the sunset date. The law also increases the tax rate on gross receipts from the sale of or charges for the rental or leasing of rental vehicles and utility trailers to 11% (from 9.25%). This rate change takes effect on October 1, 2026. This rate also applies to the sale or charges from transactions for sharing a vehicle or utility trailer made through a marketplace, including peer-to-peer sharing programs, regardless of whether the rental vehicle or utility trailer is owned by a rental operator or is part of a rental fleet. The law creates a workforce housing opportunity tax abatement, under which real property tax will be abated on certified eligible real property in an amount certified by the mayor for that year. For property to be eligible for the abatement, the developer must provide a third-party prepared fiscal analysis showing the amount of abatement required for the feasibility of the project; the real property must be developed with at least 30 housing units, and for the duration of the abatement period at least 20% of the housing units developed or redeveloped on the real property are maintained as affordable housing, among other requirements. The abatement will continue until the end of the 10th year after the tax year in which the abatement begins but could continue until the end of the 20th tax year if the Mayor determines the abatement is necessary for the project's feasibility. A tax abatement provided under this provision may not begin before October 1, 2028. The law modifies the film television and entertainment rebate fund by reducing the incentive rebate that may be provided to an eligible production company for the filming of movies, television shows or other video production in the District as follows:
The law creates a personal property tax exemption for electric vehicle charges, including 240-volt outlets installed near parking spaces and supporting equipment and associated software, effective for personal property tax years beginning after May 3, 2027. The exemption applies to electric vehicle chargers that:
B26-0661, a permanent bill that goes through the full legislative process with no expiration date, includes the same provisions as the emergency bill that has been transmitted to the Congress for a mandatory 30-in session day review period.4 At the expiration of the 30-in session day review period, B26-0661 will become permanent law if Congress has not passed a resolution disapproving the bill. The OBBBA decoupling provisions in the 2026 emergency and permanent laws are substantially similar to those enacted in 2025 as part of emergency legislation (see Tax Alert 2025-2409). The 2026 law makes the decoupling from IRC Sections 174A, 163(j) and 168(n) temporary by including a sunset date; however, the District's decoupling from IRC Section 168(k) and modified allowance of IRC Section 179 do not include sunset provisions. The District's postponement of a scheduled increase to its general sales and use tax rate provides taxpayers with additional lead time to evaluate the impact of the future rate change on their operations, systems and compliance processes. The legislation also extends the increased hotel tax rate and increases the tax rate applicable to vehicle rentals. Unlike the budget enacted last year, the law makes the hotel tax rate increase permanent by repealing the applicable sunset provision. Taxpayers that collect and remit the affected taxes should consider evaluating the necessity of making updates to tax calculation methodologies, billing practices, reporting processes and automated tax determination systems. The budget also directs the CFO to study the feasibility of enacting a BAT. Depending on the CFO's findings, a BAT could be considered in the 2027 legislative session. In a separate bill, B26-0708, the District is considering law changes necessary to transition from the Joyce method to the Finnigan method of apportionment for combined reporting purposes. Under the Finnigan method, if one member of the combined group is taxable in the District, the entire group is taxable in the District for apportionment purposes. The Joyce method looks at each member of a combined group separately in determining whether that member is taxable in the District. The District Council will hold a public hearing on B26-0708 on September 16, 2026. Click here for more information on the hearing. The District Council has scheduled a hearing on revenue proposals for the fiscal year 2028 budget on October 16, 2026. Tax proposals to be considered by the Council include a BAT, a pied-a-terre tax, a wealth proceeds tax (see B26-749), transitioning to a land value tax (see B26-777), and increasing the sales, real property and income tax rates. For tax proposals that do not have a draft bill, the Council said that it will post draft legislative language at least two weeks before the hearing for the tax proposals. The Council also indicated that the purpose of the hearing is to "better understand the consequences (benefits and harms) of different approaches to address the District's revenue growth."
Document ID: 2026-1962 | ||||||||
