Washington, D.C. Council Adopts Small Business Commercial Property Tax Relief Act

The Washington, D.C. Council ("the Council") has been trying to help small businesses stay in the District despite the unrelenting pressure on their profitably due to increased operating costs. One of the primary causes of their declining profitability has been increased property taxes.

In a well intentioned effort to reduce the property tax burden for these smaller businesses, the Council earlier this year set aside more than $11 million in funds earmarked specifically to help these local taxpayers.

These funds were later made recurring, so an effective mechanism to get them annually into the hands of the intended class of targeted small businesses was needed. Various plans were submitted in order to avoid this relief from going to larger, well financed businesses like Starbucks and McDonalds, or to the large institutional investors who typically own most of the commercial properties where these small businesses are housed and who do not need such relief to continue to operate in the District.

Unfortunately, despite all of these best intentions, the final legislation, known as the “Small Business Commercial Property Tax Relief Act of 2007” as adopted by the Council, has abandoned targeted relief to only small businesses in favor of a more easily administered and universal distribution of property tax relief to all Class 2 property owners who currently pay ad valorem real property or business personal property taxes in the District.

The highlights of this new law are summarized below:

• For all Class 2 property owners (i.e., all non-residential, non-vacant, or commercial properties), the first $3 million of assessed value will now potentially be taxed at a lower real property tax rate, but only if certain conditions are first met.
• Therefore, this is not an automatic tax abatement each year. Only if the total tax revenues generated annually for the Washington, D.C. Government increase at least 10% over the prior year’s will the real property tax rate be reduced, and then only on the first $3 million of assessed value.
• The reduced rate to be applied to this part of the assessment could go as low as $0.90 per $100 of assessed value, whereas the rest of the assessed value will be taxed at the current rate of $1.85 per $100 of assessed value.
• If tax revenues do not go up by at least 10%, no reduction in the real property rate will be granted.
• In the event that revenues do exceed 10% of the prior year’s revenues, the Chief Financial Officer will determine a lower tax rate for the first $3 million in assessed value with a floor of $0.90 per $100 of assessed value. This rate will be announced each September for the next tax year that begins each October 1st.
• The second piece of this legislative program is business personal property tax relief. The measure increases the threshold exemption before any business personal property tax is payable in Washington, D.C. from $50,000 to $225,000.
• So now, on the annual personal property tax return, due July 31st of each year, the first $225,000 of depreciated book value of tangible personal property (TPP) reported on the rendition will be exempt from taxation at the current rate of 3.40%.
• For the originally targeted small businesses, this TPP reform might provide greater relief, as long as they have that much un-depreciated personal property to report.

The new legislation, despite its noble intentions, might have unintentionally further muddled the District’s already complex, Three Class/Three Rate Real Property Tax System.

Property owners and managers may now find it even harder to produce accurate and credible annual budgetary tax estimates and accruals for future real property tax liabilities because the real property tax exemption is conditional on future Washington, D.C. tax revenue growth. Not only will this affect the preparation of annual budgets, but also pre-acquisition and pre-construction tax estimates for underwriting purposes.

Ryan is committed to helping you address these difficult issues and calculations in order to assist in the better management and minimization of your business’ local property taxes. Please contact us if you have any questions or concerns as to how this new law may affect your tax year 2009 Washington, D.C. property taxes, or to set up an introductory meeting with Ryan’s local experts.