Code of the District of Columbia

§ 47–1803.03. Gross income — Deductions.

*NOTE: This section includes amendments by temporary legislation that will expire on February 4, 2022. To view the text of this section after the expiration of all emergency and temporary legislation, click this link: Permanent Version.*

(a) Deductions allowed. — The following deductions shall be allowed from gross income in computing net income of corporations, financial institutions, unincorporated businesses and partnerships:

(1) Expenses. — All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business (except as otherwise provided herein); traveling expenses while away from home in the pursuit of a trade or business; and rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity. Any business expenses allowed under this paragraph shall be subject to the same limitations as provided for in the Internal Revenue Code of 1986.

(2) Interest. — All interest paid or accrued within the taxable year on indebtedness which is deductible under the provisions of § 163 of the Internal Revenue Code of 1986.

(3) Taxes. — All taxes paid or accrued during the taxable year which are deductible under the provisions of § 164 of the Internal Revenue Code of 1986; provided, however, that no deduction shall be allowed for:

(A) Income taxes; or

(B) Franchise taxes imposed by this chapter.

(4) Losses. —

(A) Losses sustained during the taxable year and not compensated for by insurance or otherwise:

(i) If incurred in a trade or business; or

(ii) If incurred in any transaction entered into for the production or collection of income subject to tax under this chapter, or for the management, conservation, or maintenance of property held for the production of income subject to tax under this chapter, though not connected with any trade or business; or

(iii) Of property not connected with a trade or business, if the losses arise from fire, storm, shipwreck, or other casualty, or from theft.

(B) [Deleted].

(5) Bad debts. — Debts ascertained to be worthless and determined as deductible under § 166 and related sections of the Internal Revenue Code of 1986.

(6) Insurance premiums. — All fire, tornado, and casualty insurance premiums paid during the taxable year in connection with property held for investment or used in a trade or business, the income from which is taxable under this chapter.

(7) Depreciation. — A reasonable allowance for exhaustion, wear, and tear of property used in the trade or business, including a reasonable allowance for obsolescence; and including in the case of natural resources, allowances for depletion as permitted by reasonable rules which the Mayor may promulgate. No deduction shall be allowed for the special depreciation allowance under section 168(k) of the Internal Revenue Code of 1986 [26 U.S.C. § 168(k)]. The basis upon which such allowances are to be computed shall be the basis provided for in § 47-1811.04.

(8) Charitable contributions. — Contributions or gifts, actually paid within the taxable year to or for the use of the District of Columbia, but only if the contribution or gift is made exclusively for public purposes, or any religious, charitable, scientific, literary, military, or educational institution, and no part of the net income of which inures to the benefit of any private shareholder or individual; provided, however, that such deductions shall be allowed only in an amount which in the aggregate of all such deductions does not exceed 15% of the adjusted gross income. For purposes of this section, the term “actually paid”, when used with reference to the District of Columbia, includes compensation waived under § 1-611.15.

(9) Contributions of an employer to an employees’ trust or annuity plan and compensation under a deferred-payment plan. — In the return of an employer, contributions made by such employer to an employees’ trust or annuity plan and compensation under a deferred-payment plan to the extent that deductions for the same are allowed the taxpayer under the provisions of § 404 of the Internal Revenue Code of 1986 (§ 404 of Title 26, United States Code).

(10) Allocation of deductions. — In the case of corporations, financial institutions and unincorporated businesses, the deductions provided for in this section shall be allowed only for and to the extent that they are connected with income arising from sources within the District within the meaning of §§ 47-1810.01 to 47-1810.03; and the proper apportionment and allocation of the deductions to be allowed shall be determined by the Mayor under formula or formulas provided for in § 47-1810.02.

(11) Reasonable allowance for salaries. — A reasonable allowance for salaries or other compensation for personal services actually rendered, except:

(A) No allowance shall be made for salaries or wages in an amount equal to the amount of the credit allowed under §§ 47-1808.04 and 47-1808.07; and

(B) In the case of an unincorporated business subject to the tax imposed by subchapter VIII of this chapter, the aggregate deduction for services rendered by individual owners or members actively engaged in the conduct of the unincorporated business shall not exceed 30% of the net income of the business, computed without the benefit of this deduction.

(12) Regulated investment companies. — In the case of a regulated investment company as defined in § 851 of the Internal Revenue Code of 1986, which meets the requirements of § 852(a) of the Internal Revenue Code of 1986:

(A) The dividends paid by the regulated investment company which qualify for the dividends-paid deduction under § 852(b)(2)(D) and 852(b)(3)(A)(ii) of the Internal Revenue Code of 1986, including dividends considered as having been paid during the taxable year by reason of § 855 of the Internal Revenue Code of 1986; and

(B) Such amount as the regulated investment company shall designate for purposes of § 852(b)(3)(D)(ii) of the Internal Revenue Code of 1986 as undistributed long-term capital gains to be included in computing the long-term capital gains of the shareholder. Such amounts shall be included as gains from the sale or exchange of capital assets, as defined in this chapter, in computing such shareholder’s taxable income as defined in § 47-1806.1 [§ 47-1806.01].

(13) Real estate investment trusts. — In the case of a real estate investment trust as defined in § 856 of the Internal Revenue Code of 1986, which meets the requirements of § 857(a) of the Internal Revenue Code of 1986, the dividends paid by the real estate investment trust which qualify for the dividends-paid deduction under § 857(b)(2)(C) and § 857(b)(3)(A)(ii) of the Internal Revenue Code of 1986, including dividends considered as having been paid during the taxable year by reason of § 858 of the Internal Revenue Code of 1986.

(14) Net operating losses. — In computing the net income of a corporation, an unincorporated business, or a financial institution, there shall be allowed a deduction for net operating losses, in the same manner as allowed under § 172 of the Internal Revenue Code.

(A) For tax years beginning after December 31, 1999, net operating loss carrybacks shall not be allowed. Corporations, unincorporated businesses, or financial institutions, shall be allowed a deduction for apportioned District of Columbia net operating loss carryover to be deducted from the net income after apportionment.

(B) In the year of the loss, the apportioned District of Columbia net operating loss shall be computed by multiplying the District of Columbia apportionment factor for the loss year against the amount of the net operating loss as defined in § 47-1801.04(34).

(C) The entire amount of the apportioned net operating loss for any taxable year shall be carried forward to the earliest of the succeeding taxable years to which such loss may be carried. The portion of such loss which may be carried to each of the other taxable years shall be the excess, if any, of the amount of such loss over the sum of the apportioned taxable net income, adjusted by any modifications specified in this chapter, for each of the tax years to which such loss may be carried.

(D) The provisions of §§ 381, 382, and 384 of the Internal Revenue Code apply to carryovers. The limitation amount determined under § 382 shall be applied to net income, after apportionment, in each post-change year to which loss is carried.

(E)(i) In the case of a merger, acquisition, or consolidation, any pre-change losses and built-in losses, to the extent apportioned or allocated to the District of Columbia, with the additions, subtractions, modifications and other adjustments required for purposes of this chapter, shall be carried forward and subtracted when computing District of Columbia taxable income.

(ii) If an affiliated group files a federal consolidated return for District of Columbia net operating loss purposes, the net operating loss shall be computed as if the federal return has been filed on a separate basis for the District of Columbia.

(iii) If a company has been given permission by the Mayor to file a consolidated return, only the net operating losses of those corporations listed on the District of Columbia consolidated return may be included in determining the net operating loss deduction.

(F) No deduction shall be allowed for or with respect to losses connected with income producing activities if the income therefrom would not be required to be either assignable to the District of Columbia or included in computing the taxpayer’s District of Columbia net income.

(G) The Mayor may require a taxpayer to furnish any information necessary to support a claim for deduction under this section, and no deduction shall be allowed unless the information is furnished.

(H) For tax years beginning after December 31, 2017, corporations, unincorporated businesses, or financial institutions shall be allowed an 80% deduction for apportioned District of Columbia net operating loss carryover to be deducted from the net income after apportionment.

(15) Health insurance premiums. — All health insurance premium expenditures for domestic partners and family members of employees if offered to all of its full-time employees who are District of Columbia residents.

(16) Subpart F income. — In computing the taxable income of a corporation, an unincorporated business, or a financial institution, there shall be allowed a deduction for Subpart F income as defined in § 47-1801.04(33) for taxable years beginning after December 31, 1994.

(17) [Dividends from a wholly-owned subsidiary]. — Notwithstanding paragraph (10) of this subsection and § 47-1810.01(a)(2), in computing the net income of a corporation, there shall be allowed a deduction for all dividends received on or after March 1, 1997, from a wholly-owned subsidiary.

(18) Election to expense certain depreciable business assets. —

(A) There shall be allowed as a deduction for the cost of property elected to be treated as not chargeable to capital account under section 179 of the Internal Revenue Code of 1986 an amount equal to the lesser of $25,000 or the actual cost of the property for the year the property is placed in service.

(B) [Repealed].

(19) Repealed.

(20) Capital Gains. --

(A) Deferral of a capital gains tax payment for investing in a qualified opportunity fund ("QOF") shall be realized only if the taxpayer invests in a QOF that meets the criteria set forth in subparagraph (D) of this paragraph;

(B) Reduction of capital gains tax liability through a 10% step-up in basis, if invested in a QOF for 5 years prior to December 31, 2026, and an additional 5% step-up in basis, if invested in a QOF for 7 years prior to December 31, 2026, shall be realized only if the taxpayer invests in a QOF that meets the criteria set forth in subparagraph (D) of this paragraph;

(C) Abatement of capital gains tax on an investment of capital gains in a QOF for at least 10 years before December 31, 2047, shall be realized only if the taxpayer invests in a QOF that meets the criteria set forth in subparagraph (D) of this paragraph;

(D) To receive the benefits described in subparagraphs (A), (B), and (C) of this paragraph, the taxpayer shall:

(i) Invest in a QOF that:

(I) Is certified by the Mayor as an eligible QOF pursuant to subparagraph (E) of this paragraph;

(II) Has invested at least the value of the taxpayer's investment in the QOF in a qualified opportunity zone in the District; and

(III) Has submitted its IRS Form 8996 to the Office of Tax and Revenue for the tax year in which the taxpayer is seeking the benefits described in subparagraphs (A), (B), and (C) of this paragraph; and

(ii) Submit an IRS Form 8997 to the Office of Tax and Revenue for the tax year in which the taxpayer is seeking the benefits described in subparagraphs (A), (B), and (C) of this paragraph.

(E) To be certified by the Mayor as an eligible QOF, a QOF shall submit to the Mayor documentation showing:

(i) That some or all of its investments in qualified opportunity zone businesses and qualified opportunity zone business property are in businesses or property that:

(I) Have been selected by the District government for a grant, loan, tax incentive, tax abatement, or other benefit or incentive intended to promote economic or community development in the District;

(II) Have been selected by the Office of the Deputy Mayor for Planning and Economic Development to manage the redevelopment of a property, with respect to a business, or that are owned or disposed of by the District government, with respect to a property;

(III) Have an unconditioned resolution of support from the Advisory Neighborhood Commission in which the business or property is located or a conditional resolution of support from the Advisory Neighborhood Commission in which the business or property is located and the Mayor determines that each of the conditions of the resolution have been met; or

(IV) Are located in the District and have been scored by the QOF using the Urban Institute's Opportunity Zone Community Impact Assessment Tool, or other assessment tool approved by the Mayor, and received a score of 75 (or its equivalent) or greater; and

(ii) That the dollar amount of the investments that the QOF has made in qualified opportunity zone businesses and qualified opportunity zone business property meets the standards set forth in sub-subparagraph (i) of this subparagraph.

(a-1) Deduction for domestic production activities disallowed. — In computing net income of corporations, financial institutions, unincorporated businesses, and partnerships, no deduction from gross income shall be allowed for the amount attributable to domestic production activities under section 199 of the Internal Revenue Code of 1986 [26 U.S.C. § 199].

(b) Deductions allowed — Generally. — In the case of an individual, estate, or trust, deductions allowed under this section shall be the same (and to the same extent) as the deductions allowed by the Internal Revenue Code of 1986 on federal individual or fiduciary income tax returns; provided, however, that no deduction may be allowed for the following:

(1) Income taxes;

(2) Franchise taxes imposed by this chapter;

(3) Carryovers of charitable contributions made prior to January 1, 1982, and included as deductions for federal income tax purposes;

(4) Repealed.

(5) Any deduction passing to a stockholder in a small business corporation as defined in § 1371 of the Internal Revenue Code of 1954, making an election under § 1372(a) of the Internal Revenue Code of 1954, or an S Corporation as defined in § 1361(a) and (b) of the Internal Revenue Code of 1986, making an election under § 1362(a) of the Internal Revenue Code of 1986, which is otherwise deductible under the provisions of subsection (a) of this section and which was allowable in determining the taxable income of the small business corporation or S Corporation subject to tax under the provisions of subchapter VII of this chapter;

(6) Repealed.

(7) Repealed.

(8) Repealed.

(9) A deduction allowed under section 199A of the Internal Revenue Code of 1986 (26 U.S.C. § 199A).

(b-1) [Deductions allowed — Long-term care insurance]. — For taxable years beginning before January 1, 2015, an individual may deduct from gross income the amount the individual pays annually in premiums for long-term care insurance, as defined in § 31-3601(5); provided, that the deduction shall not exceed $500 per year, per individual, whether the individual files individually or jointly.

(b-2) [Deductions allowed — Teacher expenses]. —

(1) Beginning January 1, 2006, an individual who has been a classroom teacher in a public school or public charter school in the District of Columbia for the entire year for which the individual is filing or for the entire year prior to the year for which the individual is filing and is approved for teaching by the District of Columbia Public Schools may deduct from gross income:

(A) The amount the individual paid during the year for basic classroom materials and supplies necessary for teaching; provided, that the deduction shall not exceed $500 per year, per individual, whether the individual files individually or jointly; and

(B) The amount the individual paid during the year as tuition and fees for post-graduate education, professional development, or state licensing examination and testing required for, or related to, improving teacher credentials or maintaining professional certification; provided, that the deduction shall not exceed $1,500 per year, per individual, whether the individual files individually or jointly.

(2) The deductions under paragraphs (1)(A) and (B) of this subsection shall not be allowed to the extent the same expenses were claimed by the individual in computing federal adjusted gross income for the same taxable year under the Internal Revenue Code 1986.

(b-3) Depreciation. —

(1) Notwithstanding the provisions of subsection (b) of this section, there shall be allowed as a deduction a reasonable allowance for exhaustion, wear, and tear of property used in the trade or business, including a reasonable allowance for obsolescence; and including in the case of natural resources, allowances for depletion as permitted by reasonable rules which the Mayor may promulgate. The basis upon which such allowances are to be computed is the basis provided for in § 47-1811.04.

(2) Notwithstanding the provisions of paragraph (1) of this subsection:

(A) No deduction shall be allowed for the special depreciation allowance under section 168(k) of the Internal Revenue Code of 1986 [26 U.S.C. § 168(k)].

(B) There shall be allowed as a deduction for the cost of property elected to be treated as not chargeable to capital account under section 179 of the Internal Revenue Code of 1986 [26 U.S.C. § 179] an amount of equal to the lesser of $25,000 (or $40,000 in the case of a Qualified High Technology Company) or the actual cost of the property for the year the property is placed in service.

(b-4) Limitation on itemized deductions. —

(1) In the case of an individual whose District adjusted gross income exceeds the applicable amount, the amount of the itemized deductions otherwise allowable for the taxable year shall be reduced by 5% of the excess of the District adjusted gross income over the applicable amount.

(2) For the purposes of this subsection, the term:

(A) “Applicable amount” means $200,000 ($100,000, married, filing separately).

(B) “Itemized deductions” does not include the deduction:

(i) Under section 213 of the Internal Revenue Code of 1986 relating to expenses such as, for example, medical or dental;

(ii) For investment interest, as defined in section 163(d) of the Internal Revenue Code of 1986; and

(iii) Under section 165(a) of the Internal Revenue Code of 1986, for casualty or theft losses described in section 165(c)(2) and (3) of the Internal Revenue Code of 1986, or for losses described in section 165(d) of the Internal Revenue Code of 1986.

(3) This subsection shall be applied after the application of any other limitation on the allowance of any itemized deduction.

(4) This subsection shall not apply to any estate or trust.

(b-5) Capital Gains from a Qualified Opportunity Fund. – The capital gains deduction for investing in a qualified opportunity fund shall apply to an individual, estate, or trust in the same manner as set forth in § 47-1803.03(a)(20).

(c) Standard deduction. — Every individual who claims the standard deduction on his or her federal income tax return shall claim the applicable standard deduction specified in § 47-1801.04(26). Every individual who itemizes deductions on his or her federal income tax return shall itemize the deductions permissible under this chapter. If spouses or domestic partners file separate returns, the applicable standard deduction shall be allowed to neither if the net income of one of the spouses or domestic partners is determined by itemizing deductions.

(d) Deductions not allowed. — In computing net income, no deductions shall be allowed in any case for:

(1) Personal, living, or family expenses;

(2) Any amount paid out for new buildings or for permanent improvements or betterments, made to increase the value of any property or estate;

(3) Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made;

(4) Premiums paid on any life insurance policy covering the life of any officer or employee or of any person financially interested in any trade or business carried on by the taxpayer when the taxpayer is directly or indirectly a beneficiary under such policy;

(5) If the net income of an unincorporated business for the taxable year is in excess of the exemption provided in § 47-1808.04, no deduction which is allowed or allowable under subsection (a) of this section from the gross income of any unincorporated business subject to the tax imposed by §§ 47-1808.01 to 47-1808.06 shall be allowed as deduction in the return and computation of the net income of any person entitled to share in the net income of such unincorporated business; and

(6)(A) Expenses incurred to produce income which is either exempt or not subject to taxation under this act.

(B) Notwithstanding subparagraph (A) of this paragraph, for the period beginning January 23, 1983, through September 30, 1984, expenses incurred to produce interest and dividend income on obligations or securities of the United States, or its agencies or instrumentalities, may be treated as expenses incurred to produce taxable income.

(7)(A) Any otherwise deductible interest expense or intangible expense if the interest expense or intangible expense is directly or indirectly paid to, or accrued or incurred by, one or more related members in connection directly or indirectly with one or more direct or indirect transactions.

(B) The disallowance under subparagraph (A) of this paragraph shall not apply to any portion of the interest expense or intangible expense to the extent that the corporation establishes, as determined by the Chief Financial Officer, that:

(i) The transaction giving rise to the payment of the interest expense or intangible expense between the corporation and the related member did not have as a principal purpose the avoidance of any portion of the tax due under this title;

(ii) The interest expense or intangible expense was paid pursuant to arm’s length contracts at an arm’s length rate of interest or price; and

(iii)(I) During the same taxable year, the related member directly or indirectly paid interest expense to, or the interest expense or intangible expense was accrued or incurred by, a person who is not a related member; or

(II)(aa) The related member was subject to a tax measured by its net income or receipts in the District, a state or possession of the United States, or a foreign nation that has entered into a tax treaty with the United States government;

(bb) A measure of the tax imposed by the District, a state or possession of the United States, or a foreign nation that has entered into a comprehensive tax treaty with the United States government included in the interest expense or intangible expense received by the related member from the corporation; and

(cc) The aggregate effective tax rate imposed on the amounts received by the related member is equal to or greater than 4.5%; provided, that a related member receiving the interest or intangible payment shall not be considered to be subject to a tax merely by virtue of the related member’s inclusion in a combined or consolidated return in one or more states.

(C) A subtraction from federal taxable income shall be allowed from the taxable income of a corporation equal to the amount received as royalties, interest, or similar income from intangibles from a related member, to the extent the related member, with respect to the payment, is denied a deduction under subparagraph (A) of this paragraph or there is a similar deduction denial or addition modification of a state, possession of the United States, or of a foreign nation that has entered into a comprehensive tax treaty with the United States government for intangible expenses or interest expenses paid to related members.

(D) For the purposes of this paragraph, the term:

(i) “Aggregate effective tax rate” means the sum of the effective rates of tax imposed by the District of Columbia, states, or possessions of the United States, and foreign nations that have entered into comprehensive tax treaties with the United States government, where a related member receiving a payment of interest expense or intangible expense is subject to tax and where the measure of the tax imposed included the payment.

(ii) “Intangible expense” means:

(I) An expense, loss, or cost for, related to, or in connection directly or indirectly with the direct or indirect acquisition, use, maintenance, management, ownership, sale, exchange, or any other disposition of intangible property, to the extent the expense, loss, or cost is allowed as a deduction or cost in determining taxable income for the taxable year under the Internal Revenue Code of 1986;

(II) A loss related to or incurred in connection directly or indirectly with factoring transactions or discounting transactions; or

(III) A royalty, patent, technical, or copyright and licensing fee; or

(IV) Any other similar expense or cost.

(iii) “Intangible property” means patents, patent applications, trade names, trademarks, service marks, copyrights, and similar types of intangible assets.

(iv) “Interest expense” means an amount directly or indirectly allowed as a deduction under section 163 of the Internal Revenue Code for purposes of determining taxable income under the Internal Revenue Code of 1986.

(v) “Related entity” means a person that, under the attribution rules of section 318 of the Internal Revenue Code of 1986, is:

(I) A stockholder who is an individual or a member of the stockholder’s family enumerated in section 318 of the Internal Revenue Code of 1986, if the stockholder and the members of the stockholder’s family own directly, indirectly, beneficially, or constructively, in the aggregate, at least 50% of the value of the taxpayer’s outstanding stock;

(II) A stockholder or a stockholder’s partnership, limited liability company, estate, trust, or corporation, if the stockholder and the stockholder’s partnership, limited liability company, estate, trust, or corporation own directly, indirectly, beneficially, or constructively, in the aggregate, at least 50% of the value of the taxpayer’s outstanding stock; or

(III) A corporation or a party related to the corporation in a manner that would require an attribution of stock from the corporation to the party or from the party to the corporation under the attribution rules of section 318 of the Internal Revenue Code of 1986, if the taxpayer owns directly, indirectly, beneficially, or constructively, at least 50% of the value of the corporation’s outstanding stock.

(vi) “Related member” means:

(I) A person that, with respect to the taxpayer any time during the year, is a related entity;

(II) A component member, as defined in section 1563(b) of the Internal Revenue Code of 1986;

(III) A controlled group of which the taxpayer is also a component; or

(IV) Is a person to or from whom there is attribution of stock ownership in accordance with section 1563(e) of the Internal Revenue Code of 1986.

(e) Lower income rental housing depreciation deduction. — An investor in a shared equity financing agreement may qualify for a depreciation deduction as provided in § 47-3507.