Own a DC Business? Whatever Your Entity Type, DC Can Tax It 8.25% 💸

Hi,

If you own a business in DC, the structure you chose decides which returns you file and which taxes you owe, and DC treats entities differently than the IRS does. An S-corp, for example, is a pass-through federally but is taxed like a C-corp in DC. Many owners only learn this after a notice arrives.

What does each type of business actually pay and file?

• Single-member LLC or sole proprietor – federal tax plus 15.3% self-employment tax on net earnings up to $184,500 in 2026, DC income tax from 4% to 10.75%, and possibly the DC unincorporated business franchise tax of 8.25% on Form D-30
• Multi-member LLC – Form 1065 and a K-1 for every owner due March 15, each owner taxed on their share whether or not cash was paid out, and the same D-30 franchise tax on the business itself, due April 15
• S-corp – Form 1120-S due March 15, but DC taxes it as a C-corp at 8.25% on the D-20, due April 15, a month after the federal return
• C-corp – a flat 21% federal tax on Form 1120, DC franchise tax of 8.25% on the D-20, and tax again on dividends when profit reaches you

The DC franchise tax carries a $250 minimum, or $1,000 if DC gross receipts are over $1 million, even in a year with a loss.

Where most owners leave money on the table:

• The personal services exemption – an unincorporated business doesn’t have to file the franchise return if more than 80% of its gross income comes from personal services performed by its owners and capital isn’t a material income-producing factor. Many consultants and professional partnerships qualify and never confirm it
• Your entity structure – an S-corp election can reduce self-employment tax, but DC taxes it at 8.25% anyway, and the exemption above is written for unincorporated businesses, so in DC the numbers have to include a tax that other states don’t have
• Owner pay – the mix of salary, guaranteed payments, distributions, and dividends changes your payroll tax and the deduction to the company, and it should be set on purpose
• Deductions – home office, vehicle, software, travel, phone, and internet are commonly under-claimed, along with owner health insurance
• Equipment and year-end purchases – federal 100% bonus depreciation applies to qualifying property acquired after January 19, 2025, but DC does not allow it and limits the Section 179 expense to $25,000
• Retirement contributions – a Solo 401(k), SEP IRA, or company plan lowers taxable income, and some deadlines fall at year end
• Estimated payments – business estimates on April 15, June 15, September 15, and December 15, and personal estimates that end on January 15, so two schedules need to line up

The risk is that the business return and the personal return are separate systems. Late payments add 5% per month up to 25% plus 10% interest compounded daily, and unfiled returns or more than $1,000 owed can block your Certificate of Clean Hands, which DC requires for business licenses, permits, and contracts. The fourth quarter is when the biggest decisions get made: purchases before December 31, retirement contributions, the December 15 business estimate, and whether to change your structure for 2027. If an S-corp election makes sense, it’s due by March 15, 2027 to take effect on January 1.

That’s why we handle business taxes end to end, federal and DC, so nothing falls between your business return, your personal return, and your payments:

• A full review of your current setup – your structure, deductions, and whether you owe the business franchise tax at all
• Federal and DC returns together – your business and personal returns prepared by the same team, so every number lines up
• Estimated payment planning – amounts and dates set for both the IRS and DC, so you avoid penalties without overpaying
• Entity analysis – we model your real numbers across every structure, including the DC franchise tax, and file the election only if it pays
• Year-end planning – purchases, retirement contributions, and timing decisions made before the deadline, not after
• DC compliance, handled – the biennial report, the Basic Business License, and your Certificate of Clean Hands

Reply to this email by Friday and we’ll set up a free 15 minute call with our senior tax advisor. Bring your most recent tax return and your year to date profit and loss, and we’ll show you where your business is overpaying and what to do about it.

Sincerely,

—
George Dimov, CPA
Licensed and Insured
(833) 829-1120 toll free
(212) 994-8081 Fax
www.dimovtax.com