Even though combined reporting was enacted in 2011, the District of Columbia Office of Tax and Revenue continues to provide additional guidance on its impact.
Combined groups operating under a structure that historically allowed owners or certain entities in the group to avoid filing District of Columbia (DC) income/franchise tax returns may now be required to be included in a combined return. The combined reporting regulations have the potential to make substantive changes in the way taxpayers file and in what taxes they owe to DC.
A combined group generally means businesses with common ownership and includes all persons subject to tax or that would be subject to tax within DC even if those persons do not have nexus. The term "persons" includes, but is not limited to, any unincorporated business, financial institution, utility company, transportation company, S corporations, real estate investment trust (REIT), and regulated investment company (RIC). According to this definition, all entities are includible in a combined group if the group is considered to be unitary in nature.
The bottom line is that combined reporting has the potential to expand your tax base and dilute apportionment factors possibly subjecting additional income (or losses) to DC taxes, even when that income arises in a separate entity located in another state. Whether this increases or decreases your DC tax is dependent upon your facts and circumstances. Keep in mind this only applies if your group of entities is considered unitary and which members of that group have nexus in DC.
Combined reporting also has the potential to tax gains that previously were excluded from DC taxable income. Unincorporated businesses who sold property and terminated their business can exclude the gain from their unincorporated business return under regulation 117.13 as the gain is taxable to the owners of the business rather than the unincorporated business that held the property. Depending upon your structure, combined reporting has the potential to make this gain taxable on a combined filing.
Planning for DC combined reporting
- Companies that should have filed a combined return for 2011 should review their structures to determine if an amended return is not only required, but advantageous. For example, if a combined group would have included entities with net operating losses, companies may consider filing an amended return to utilize the net operating losses against the current-year income of other group members.
- Entities that own real estate in DC should seek assistance before any transaction or sale takes place to determine if any planning or structuring can be implemented to reduce negative results. A critical issue is the possible loss of the DC gain exclusion on the sale of real estate that many businesses have enjoyed through the years.
- Qualified high-tech companies will be addressed in a subsequent set of regulations (issue date is unknown).
Definition of a unitary group
A single economic enterprise that is made up of separate parts of a single business entity or of a commonly owned or controlled group of business entities that are sufficiently interdependent, integrated, and interrelated through their activities so as to provide synergy and mutual benefit that produces a sharing or exchange of value among them and a significant flow of value to the separate parts.
If you are a unitary group and some of your members do not have DC nexus, these entities (whether incorporated or unincorporated) should still be part of the DC combined report. You should note that passive holding companies owning more than 50 percent of operating affiliates are deemed unitary under the regulations.
Please contact your Baker Tilly tax advisor to discuss how the DC combined reporting regulations impact you and your business.