D.C. QHTC Incentives: Subtle Changes Could Have Big Impact

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Companies that previously have or have not applied for Qualified High Technology Company (“QHTC”) status in the District of Columbia should reassess their operations to see if they can take advantage of QHTC incentives for tax year 2013 and beyond.  Legislation has passed in the District that changes the definition of QHTC and also modifies the eligibility for some of the benefits [Technology Sector Enhancement Act of 1012, L. 2013, Act 19-513 (Law 19-211), effective 03/05/2013]Aronson is urging taxpayers to evaluate and take advantage of these incentives before they change even further.  We expect that these incentives will be significantly reduced for coming tax years, both in amount of the incentive and number of companies eligible.

For tax year 2013, the principal change in the law pertains to the gross revenue that is required to be from one or more qualifying activities (i.e., internet related services, information and communication technology, advanced materials technologies, or engineering, biotechnology, or defense technology).  The old law required that a company must derive at least 51% of its gross revenue from qualifying activities.  The new rule requires that at least 51% of its gross revenue earned in the District be from qualifying activities.  Therefore, under the new law, taxpayers need to examine their District gross revenue and determine if at least 51% of such revenue is derived from qualifying activities.  Depending on the particular makeup of a company’s revenue, this change could result in a previously ineligible company now meeting the definition of a QHTC or could cause a business to no longer qualify as a QHTC.

The Act also changes the application of the five-year corporate franchise tax exemption.  First, the exemption will no longer be dependent on whether a QHTC conducts business in a high technology development zone.  Thus, any corporation that is a QHTC will have a five-year corporate franchise tax exemption.  Further, for QHTCs certified on or after 1/1/2012, the five-year exemption period will no longer begin when the company commenced business in the District.  Instead, the five-year exemption will not commence until the company has taxable income.

Generally, the credits and incentives available to companies meeting the definition of a QHTC will not change as a result of the Act.  The following benefits will still be available to QHTCs:

  • Reduced franchise tax rate of 6%, as opposed to 9.975%;
  • Five-year corporate franchise tax exemption;
  • Exemption from the entity-level unincorporated business tax
  • Certain tax credits, including:
    • Cost of retraining qualified disadvantaged employees;
    • Wages paid by a corporation to qualified disadvantaged employees;
    • Wages paid by a corporation to qualified employees for first 2 years; and
    • Reimbursement payments made by corporations for employee relocation costs;
  • Other tax benefits, including:
    • Reduction in real property tax;
    • Sales tax exemption on purchases of certain computer equipment and sales by a QHTC of certain services; and
    • Leasehold improvement deductions.

However, the legislation does repeal the provision that excludes from District gross income qualified capital gains from the sale of assets held for more than five years.  Such assets include stock in a QHTC, a capital or profits interest in a QHTC partnership, or tangible property used in the business of a QHTC.

Taxpayers should considered the potential impact of the new rules now, as the changes could influence 2013 estimated payments as well as filing methodology.

For further information, please contact your Aronson tax advisor or Michael Colavito, State and Local Tax Services Group at 301.231.6200.

About Michael Colavito, Jr.

Michael L. Colavito, Jr. is a senior manager in Aronson LLC’s Tax Services Group, where he provides multi-state taxation services pertaining to income, franchise, sales and use, and property taxes. Michael’s experience also includes representing clients at all stages of tax controversy, from audit through appellate litigation, and advising them on restructurings, state tax refund and planning opportunities.

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