By Denis Del Bene, JD, LL.M., Checkpoint News
The “Fiscal Year 2027 Budget Support Act of 2026,” which was sent to Congress for review, has been enacted. The legislation generally mirrors previously enacted emergency budget support legislation (Act 26-416). Among numerous provisions, the legislation: (1) amends D.C.’s conformity with various provisions of the IRC; (2) replaces pass-through income exclusions with a new nonrefundable personal income tax credit for D.C. franchise taxes paid through unincorporated businesses and S corporations; (3) delays a scheduled general sales and use tax rate increase; (4) reduces the D.C. earned income tax credit; (5) repeals personal exemptions and amends the standard deduction for personal income tax purposes; (6) extends and expands the alternative fuel vehicle conversion credit to cover the conversion of mobile food vendor generators; (7) extends the alternative fuel infrastructure credit and limits the credit to infrastructure that stores and dispenses electricity and hydrogen; (8) amends supermarket tax incentives; (9) increases the rental car tax to 11% from 9.25% and makes permanent the additional 1% tax on lodgings; (10) amends real property tax abatements for downtown housing and for repositioned property in the central Washington area; (11) enacts real property tax abatements for workforce housing, former federal property development, and WMATA joint development property; and (12) enacts a personal property tax exemption for publicly accessible charging stations. Other provisions address appeals of income tax refund denials to the D.C. Superior Court, a business activity tax feasibility study, and reduced dissolution-related filing fees. (L. 2026, Act 26-418 (Law 26-189), effective 10/02/2026 and applicable 10/01/2026 unless otherwise provided.)
D.C. temporarily decouples from full expensing of domestic research and experimental expenditures under IRC §174A
The legislation provides that, for tax years beginning after December 31, 2021, but before January 1, 2028, the deduction allowed for domestic research and experimental (R&E) expenditures under IRC § 174A must be: (1) charged to the capital account; and (2) allowed as an amortization deduction ratably over the 5-year period beginning with the midpoint of the tax year in which the expenditures are paid or incurred.
The legislation further provides that: (1) Taxpayers will not be allowed the election to amend a tax return under the transitional rules under section 70302(f)(1) of the One Big Beautiful Bill Act (OBBBA). This election allows qualified small businesses (average annual gross receipts of $31 million or less) to apply immediate expensing retroactively to tax years after December 31, 2021. (2) Taxpayers will not be allowed the election under the transitional rules under section 70302(f)(2) of the OBBBA. This election allows taxpayers who capitalized domestic R&E from 2022-2024 to deduct remaining unamortized amounts over one or two years starting in the first tax year after December 31, 2024.
Conformity to business interest deduction limitation under IRC §163J amended for tax years 2025 through 2029
For tax years beginning after December 31, 2024, but before January 1, 2030, the legislation provides that, in computing the limitation on business interest under IRC § 163, “adjusted taxable income” means the adjusted taxable income determined under IRC § 163(j)(8)(A) except, that IRC § 163(j)(8)(A)(v) does not apply. Under IRC § 163(j)(8)(A)(v), “adjusted taxable income” is computed without regard to deductions allowed for depreciation, amortization, or depletion. The legislation also provides that, in computing the limitation on business interest under IRC § 163, “floor plan financing interest,” as defined under IRC § 163(j)(9) does not apply.
D.C. temporarily decouples from special depreciation election for qualified production property
For tax years beginning after December 31, 2024, but before January 1, 2030, the legislation provides that no deduction is allowed for the special depreciation allowance under IRC § 168(n) (100% depreciation election for qualified production property (QPP).)
D.C. conforms to federal deductions for tips, overtime compensation, personal car loan interest, enhanced senior deduction beginning with tax year 2026
The legislation provides that the following deductions are allowed for tax years beginning after December 31, 2025:
- The deduction for qualified tips under IRC § 224.
- The deduction for qualified overtime compensation under IRC § 225.
- The deduction for personal car loan interest allowed under IRC § 163(h)(4).
- The deduction for the enhanced senior deduction allowed under IRC § 151(d)(5)(C).
For tax years beginning before January 1, 2026, no deductions are allowed for these deductions.
D.C. temporarily decouples from non-itemizers charitable deduction for individuals
For tax years beginning after December 31, 2024, but before January 1, 2030, individuals, estates, and trusts who did not elect to itemize must include in D.C. gross income any income deducted or otherwise excluded pursuant to IRC § 170(p) for that tax year.
D.C. decouples from federal qualified small business stock gain exclusion for certain 2025 transactions
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 their federal gross income pursuant to IRC § 1202(a) for that tax year, provided that the sale or exchange of qualified small business stock occurred on or after December 3, 2025.
Income tax credit enacted for franchise taxes paid through unincorporated businesses and S corporations, income exclusions sunset
For tax years beginning after December 31, 2025, the legislation enacts a nonrefundable individual income tax credit for individuals and trusts and estates for their pro rata share of corporate franchise taxes or unincorporated business franchise taxes paid through S corporations and unincorporated businesses. In the case of any person whose adjusted gross income includes a distributive share of net income from an unincorporated business or a share in the income of an S corporation, a nonrefundable income tax credit will be allowed in an amount equal to the lesser of: (1) the person’s pro rata share of the corporate income tax or unincorporated business tax actually paid by the entity; or (2) the individual income tax imposed on the person. For the credit to be allowed, the unincorporated business or S corporation must have filed a tax return for the tax year for which the credit is claimed and paid all taxes due.
For tax years beginning on and after January 1, 2026, the legislation ends the prior gross income exclusions allowed a person for income tax purposes for their distributive share of the trade or business net income from an unincorporated business or their pro rata share of S corporation income, to the extent that income was otherwise taxed by the District.
2026 increase in general sales and use tax rate delayed
Under current law, the general sales and use tax rate was scheduled to increase to 7% from 6% on October 1, 2026. The legislation delays this scheduled increase in the general rate. The general rate will now increase to 7% from 6% on October 1, 2027.
D.C. earned income credit reduced
The legislation provides that, for returns filed for a full calendar or fiscal year ending on December 31, 2025, the D.C. earned income credit remains equal to 100% of the federal earned income tax credit allowed under IRC § 32. For returns filed for a full calendar or fiscal year beginning after December 31, 2025, but before January 1, 2029, the credit is reduced to 85% of the federal credit. For tax years beginning after December 31, 2028, the D.C. earned income tax credit is scheduled to return to 100% of the federal credit under pre-existing statutory provisions.
Personal exemptions repealed
The legislation repeals D.C. Code Ann. §47-1806.02 under which residents are allowed personal exemptions as deductions in computing their taxable income.
Standard deduction amended
For tax years beginning before January 1, 2025, the District’s standard deduction was the standard deduction under IRC § 63(c). The legislation provides that, for tax years beginning after December 31, 2024, but before January 1, 2030, the District’s standard deduction is the “basic standard deduction” plus any additional deduction allowed for the aged and blind under IRC § 63(c)(3). For the tax year ending December 31, 2025, the “basic standard deduction” amount is: $15,000 for a single individual or married individual filing a separate return; $22,500 for a head of household; and $30,000 for married individuals filing a joint return, separate on a combined return, or a surviving spouse. For tax years beginning after December 31, 2025, but before January 1, 2030, these amounts will be increased annually pursuant to a cost-of-living adjustment.
For tax years beginning after December 31, 2029, the District’s standard deduction is once again the standard deduction under IRC § 63(c).
Alternative fuel vehicle conversion credit extended and expanded to cover conversion of mobile food vendor generators
The District of Columbia allows a nonrefundable alternative fuel vehicle conversion credit against the corporate and individual income tax and the unincorporated business tax in the amount of 50% of the equipment and labor costs directly attributable to the cost to convert a motor vehicle that operates on diesel or gasoline to a motor vehicle that operates on an alternative fuel, up to $19,000 per vehicle. The legislation extends the fuel vehicle conversion credit through December 31, 2035. The credit was previously scheduled to expire on December 31, 2026. The definition of alternative fuel is amended to exclude biodiesel.
Beginning with the tax year after December 31, 2025, the credit is expanded to cover the equipment and labor costs directly attributable to the replacement of a fossil-fuel-powered generator or other greenhouse-gas or pollution-creating generator with a battery-powered or zero-emissions generator used to supply electrical power to appliances for food preparation and servicing in a mobile vending vehicle operated by a mobile vendor, up to $15,000 per replaced generator. For purposes of credits claimed against the individual income tax, the generator credit must be claimed in equal amounts over a 3-year period and cannot be claimed in a tax year in which the taxpayer operated a trade or business in the District related to the mobile vending vehicle that had gross income of more than $12,000 for that tax year.
Alternative fuel infrastructure credit extended and limited to infrastructure that stores and dispenses electricity and hydrogen
The District of Columbia allows a nonrefundable alternative fuel infrastructure credit against the corporate income tax and the unincorporated business tax in an amount equal to 50% of the equipment and labor costs directly attributable to the purchase and installation of alternative fuel storage and dispensing or charging equipment on a qualified alternative fuel vehicle refueling property. The credit was previously scheduled to expire on December 31, 2026. The legislation extends the fuel vehicle conversion credit through December 31, 2036.
The District also extends through the tax year ending December 31, 2036, a similar nonrefundable credit against the individual income tax. Beginning with the tax year after December 31, 2026, the credit against the individual income tax will be equal to 50% of the equipment and labor costs directly attributable to the purchase and installation by the taxpayer of alternative fuel storage and dispensing or charging equipment in a property that is the dwelling of the taxpayer and located in the District, up to $1,000 per vehicle charging station. An “eligible applicant” is a resident who is an owner or lessee of a qualified private residence.
After December 31, 2026, the legislation amends the definition of “alternative fuel” for purposes of the credits to mean a fuel used to power a motor vehicle that consists of one or more of the following: (1) electricity provided by a vehicle-charging station; or (2) hydrogen. The definition of alternative fuel previously included: 85% ethanol, natural gas, compressed natural gas, liquified natural gas, liquified petroleum gas, biodiesel, electricity provided by a vehicle-charging station, or hydrogen.
Supermarket tax incentives amended
Under current law, the District provides 10-year real property tax, personal property tax, and license fee exemptions for the development of a qualified supermarket and a sales and use tax exemption on purchases of building materials related to the development of a qualified supermarket. The legislation reduces the real property, personal property, and license fee exemption periods to five years from 10 years for qualified supermarkets certified after October 1, 2026. The legislation also allows a 5-year exemption period for qualified supermarkets that experience hardship in each of the two tax years prior to the supermarket’s request for certification of eligibility for the exemption. For this purpose, “hardship” means operating at a net loss for a tax year, as demonstrated on a profit and loss statement.
The legislation also permits the Mayor to extend a tax exemption received or previously extended in increments of not more than five years, if the Mayor determines that: (1) the entity continues to be a qualified supermarket; (2) an extension of the tax exemption is necessary to maintain the financial or operational viability of the supermarket; and (3) the supermarket is fulfilling a need that would otherwise not be met in the surrounding community by providing access to a variety of food and grocery options.
The legislation amends the definition of a development qualifying a supermarket for the exemption to mean the improvement of a qualified supermarket for which building permits are issued on or after October 1, 2026. For this purpose, an “improvement” means a capital investment within any 24-month period in the qualified supermarket that exceeds 10% of the current assessed value of the building space (previously, 50% of the adjusted basis of the building) being leased or owned for the qualified supermarket, exclusive of parking.
Rental car tax increased, additional tax on lodgings made permanent
The legislation increases the sales tax on the rental or leasing of rental vehicles and utility trailers to 11% from 9.25%, after September 30, 2026. The legislation clarifies that this tax applies to charges from any transactions for the sharing of a vehicle or utility trailer made through a marketplace, including a peer-to-peer sharing program, regardless of whether the rental vehicle or utility trailer is owned by a rental operator or is part of a rental fleet.
The legislation also makes permanent the additional 1% tax on lodgings imposed under D.C. Code Ann. §47-2002.03(a)(2). This additional tax was previously scheduled to sunset on September 30, 2027.
Workforce housing opportunity tax abatement enacted
The legislation establishes a new 10-year real property tax abatement, extendable up to 20 years, for qualifying workforce housing projects certified as eligible by the Mayor. To qualify, developers must provide a third-party fiscal analysis showing the abatement amount required for project feasibility and develop at least 30 housing units. For the duration of the abatement, at least 20% of units must be maintained as affordable to households earning 80% or less of median family income, and at least 20% must be maintained as affordable to households earning 80% to 100% of median family income. Developers also must record a covenant in District land records, contract with certified business enterprises for at least 35% of construction and operations contract dollars, enter into a First Source Agreement, and enter into an agreement with the Mayor.
The abatement cannot begin before October 1, 2028. The total annual abatement amounts would be capped at $4 million for fiscal year (FY) 2029, $5 million for FY 2030, $6 million for FY 2031, and, for FY 2032 and subsequent fiscal years, 105% of the prior-year cap.
Federal property development tax abatement enacted
The legislation authorizes the Mayor to grant a real property tax abatement, for up to 15 years, to former federal government property that was owned by the District or the federal government and is sold or leased to a private entity pursuant to a development agreement for a project that has 200,000 square feet or more in gross floor area. The land must have been disposed of by the federal government after January 1, 2026, and must have been previously tax exempt while owned by the federal government or the District. The Mayor determines the number of years and the annual amount of the abatement. The owner or ground lessee must also demonstrate to the Mayor that a tax abatement is necessary for the project to be financially feasible.
To qualify, the owner or ground lessee of the real property must enter into an agreement with the District that, among other requirements, requires the developer to: (1) maintain at least 10% of the housing units developed or redeveloped on the real property as affordable to households earning on average 60% or less of the median family income; and (2) ensure that at least 10% of the housing units offered for sale are affordable to households earning on average 80% or less of the median family income.
Compact agency (WMATA) joint development property tax abatement enacted
The legislation authorizes the Mayor to grant real property tax abatements for certain properties associated with Washington Metropolitan Area Transit Authority (WMATA) joint development projects, for up to 20 years. The property must be currently or previously owned by the WMATA and be currently or previously subject to a joint development agreement with the WMATA and must be located at an eligible compact agency joint development site. An “eligible compact agency joint development site” means a site located on property currently or previously owned by WMATA and within 1,750 feet of a Metrorail station. The Mayor will determine the number of years and the annual amount of the abatement. The owner or ground lessee must demonstrate: (1) that a tax abatement is necessary for the project to be financially feasible; and (2) the amount of the tax abatement necessary for the project to be financially feasible. The project to be developed on the property subject to the abatement must be determined by the Mayor to be of special merit, providing significant benefits to the District or to the community in which the project is located.
The third-party owner or ground lessee of the real property must enter into an agreement with the District that, among other requirements, requires the developer to: (1) maintain at least 10% of the housing units developed or redeveloped on the real property as affordable to households earning on average 60% or less of the median family income; and (2) ensure that at least 10% of the housing units offered for sale must be affordable to households earning on average 80% or less of the median family income.
Tax abatement for downtown housing amended
Under current law, the Mayor may approve tax abatements for real property located in an “eligible area” that undergoes a change of use to provide at least 10 housing units, provided certain conditions are met. The legislation makes various amendments to the requirements for a downtown housing tax abatement: The definition of a “bedroom” for purposes of the abatement is amended to mean a habitable room that: (1) has a closet; (2) is designated as a bedroom or sleeping room on construction plans; and (3) receives natural light and ventilation in accordance with the relevant construction code, regardless of whether the room has immediate access to an exterior window. The property owner must enter into an agreement with the District that requires the owner to contract with certified business enterprises for at least 35% of the contract dollar volume of the construction (previously construction and operations) of the project. The legislation clarifies that if the Mayor determines that a property is no longer eligible to receive the abatement, the OTR must assess and collect any tax benefits improperly received during the period of ineligibility, plus interest.
Tax abatement for repositioned property in central Washington area amended
Under current law, qualifying properties in an eligible area that undergo a “repositioning” may receive a 15-year property tax abatement. The legislation amends the definition of a “repositioning” to mean the construction or substantial improvement of a property that results in the conversion of the property from a primarily non-residential use to a new non-residential use or that results in an upgrade of a primarily office use to class A or higher from a class below class A and the conversion or upgrade of the property results in the property being expanded to 50,000 square feet or more. The legislation also amends the total dollar amount of abatements the Mayor may certify for a real property tax year as follows: for 2027 the total amount is reduced to zero from $5 million; for 2028 to $2.75 million from $6 million; for 2029, to $3.55 million from $8 million; for 2030 the amount is set at $4.05 million; and for 2031 and each subsequent real property tax year, the amount is set at 104% of the prior year’s cap.
Deadline for appeal of income tax refund denial
Retroactively effective as of July 12, 2022, the legislation provides that any person who is aggrieved by the denial of a claim for a refund of corporate or individual income taxes may appeal to the superior court within six months from the denial of the claim for refund.
Personal property tax exemption for publicly accessible charging stations enacted
For personal property tax years beginning after May 30, 2027, the legislation enacts an exemption against the personal property tax for electric vehicle chargers, including volt outlets installed near parking spaces and supporting equipment and associated software, that: (1) provide electricity for the recharging of battery electric motor vehicles or plug-in hybrid motor vehicles; and (2) are operational and available for use by the public during the tax year for which the exemption is claimed.
Dissolution-related filing fees reduced
The legislation reduces certain dissolution-related filing fees to $5 from $220 for most corporations, partnerships, limited liability companies, and trusts; to $5 from $80 for nonprofit corporations.
Tobacco permit fees reduced
The legislation renames tobacco “licenses” as “permits” and increases certain tobacco permit fees as follows: wholesaler permit fee: to $125 from $50; retailer permit fee: to $75 from $15; and vending machine operator’s permit fee: to $75 from $15.
Golden Triangle BID rate change
The legislation authorizes a 3% annual increase in the prior year’s BID tax rate, for 2027 and subsequent tax years.
Business activity tax feasibility study
By January 31, 2027, the Chief Financial Officer must submit a report to the Mayor and D.C. Council concerning the feasibility and administrative requirements of creating a new Business Activity Tax in the District. The legislation defines a “business activity tax” as a tax on the gross receipts of every business with substantial nexus in the District. The tax would be calculated by subtracting the sum of purchases from other businesses, rent, and capital expenditures, from gross receipts that exceed $200,000.
