Taxes on Business Income in DC
The District of Columbia assesses an income tax on corporations and unincorporated businesses, in addition to a personal income tax.
In the District of Columbia, you're generally free to choose to operate your business as a C corporation, S corporation, partnership, limited liability company (LLC), or sole proprietorship. However, in the District of Columbia, the entity type you select for your business will have very little impact on the business tax liability you will incur.
All Businesses Must Pay Franchise Tax
The District does not have a corporate level income tax. Instead, if your business is operated as a corporation, partnership, limited liability company, or sole proprietorship, you will be responsible for paying a franchise tax on your business income. The tax is calculated by multiplying the tax rate of 9.975 percent (9.5 percent plus a surtax) by the income derived from sources within the District of Columbia. If your business has no greater than $1 million in gross receipts, the District of Columbia requires you to pay a minimum tax of $250 annually.
The District of Columbia imposes a tax on the net income of unincorporated businesses with gross receipts more than $12,000. This is different from the federal rule that disregards a sole proprietorship as an entity for tax purposes. However, a 30 percent salary allowance for owners and a $5,000 exemption are deductible from net income to arrive at taxable income. Also, a business is exempt if more than 80 percent of gross income is derived from personal services rendered by the members of the entity and capital is not a material income-producing factor. A trade, business or professional organization that by law, customs or ethics cannot be incorporated is exempt.
The District provides exemptions from this tax to certain types of business entities. The entities exempt from this tax include:
- labor organizations
- insurance companies
- service partnerships
- nonprofit cemetery companies
- fraternal benefit organizations and
- nonprofit corporations and business organizations