How to File a DC D-20 for Your Washington, D.C. S Corporation

Filing a D-20 tax return is a key requirement for S corporations operating in Washington, D.C. While these corporations pass income and losses to shareholders for federal taxes, the District treats them as C corporations for local tax purposes. As a result, they must file Form D-20 and pay franchise taxes.

Eligibility for Filing

S corporations must determine whether they meet Washington, D.C.’s filing requirements for Form D-20. The District does not recognize the federal S corporation election, meaning these entities are taxed as C corporations locally. Any S corporation conducting business, earning income, or owning property in D.C. must file. This includes companies with a physical presence, such as an office or storefront, as well as those generating revenue from services or sales within the District, even if they operate remotely.

D.C. tax law defines “engaging in business” broadly. Companies with employees in the District, contracts executed within its jurisdiction, or significant economic activity—such as exceeding the $250,000 gross receipts threshold—must file. Even businesses without a physical location in D.C. may be subject to tax if they meet the economic nexus standard, which applies to entities deriving substantial revenue from local customers.

Certain exemptions exist but are limited. Nonprofits may qualify for exemption with a certificate from the Office of Tax and Revenue. However, simply being registered as an S corporation does not exempt a business from filing obligations. Qualified High Technology Companies (QHTCs) may be eligible for reduced tax rates but must still submit Form D-20 to claim any benefits.

Income Allocation and Apportionment

Corporations conducting business inside and outside the District must allocate and apportion income so only the portion attributable to D.C. activities is taxed. The apportionment formula follows a three-factor method, incorporating sales, property, and payroll, with sales receiving the most weight.

The sales factor is determined by dividing revenue from D.C. customers by total company revenue. This includes tangible goods shipped to District addresses and services performed for local clients. D.C. applies market-based sourcing, meaning revenue is assigned to the location where the customer receives the benefit. For example, a consulting firm headquartered in Virginia but advising D.C.-based clients must include those service fees in its local apportionment calculation.

The property factor accounts for owned or rented real estate, equipment, and other tangible assets in D.C. relative to total company assets. Lease payments are converted into an equivalent property value using a multiplier, typically eight times the annual rental expense. Payroll is calculated by comparing compensation paid to employees working in the District against total company payroll. Remote employees performing tasks for D.C. clients may also be considered, depending on the nature of their work.

Deductible Business Expenses

D.C. generally follows federal guidelines for business deductions, allowing corporations to subtract ordinary and necessary expenses directly related to operations. This includes costs such as employee wages, rent, utilities, and depreciation on business assets. However, certain local limitations may apply.

Net operating losses (NOLs) are treated differently than at the federal level. While the IRS permits indefinite carryforwards, D.C. limits them to 20 years and does not allow carrybacks. Franchise tax deductions for interest expenses may also be restricted under the District’s conformity with IRC Section 163(j), which caps business interest deductions at 30% of adjusted taxable income. Companies with significant financing costs should assess how these limitations affect their tax liability.

Employee compensation and benefits are deductible, but payments to owners must be reasonable to avoid reclassification as disguised dividends. Entertainment expenses are largely non-deductible, though business meals may still qualify for a 50% deduction. Advertising and marketing costs remain fully deductible.

Credits and Adjustments

Washington, D.C. offers tax credits and adjustments that can reduce an S corporation’s franchise tax liability on Form D-20. The Qualified High Technology Company (QHTC) credit provides substantial benefits to eligible businesses engaged in technology-related activities. These companies may claim credits for wages paid to qualified employees, reducing tax obligations while incentivizing local job creation. The QHTC benefits also include a reduced franchise tax rate of 6% instead of the standard 8.25%.

Other credits include the Organ and Bone Marrow Donor Credit, which allows businesses to claim up to 25% of wages paid to employees who take leave for organ or bone marrow donation. The Sustainable Energy Credit encourages investment in energy-efficient upgrades by offering tax reductions for costs associated with renewable energy installations.

Filing Requirements

Form D-20 is due on the 15th day of the fourth month following the end of the corporation’s tax year, meaning most calendar-year filers must submit by April 15. Businesses may request a six-month extension by filing Form FR-128, but this only extends the deadline for submission, not payment.

Payments must be made electronically if the total tax liability exceeds $5,000, using the District’s MyTax.DC.gov portal. Estimated tax payments are required if the corporation expects to owe more than $1,000 in franchise taxes for the year, with quarterly installments due on April 15, June 15, September 15, and December 15. Failure to meet estimated payment requirements can result in underpayment penalties. Keeping accurate financial records helps avoid unexpected liabilities.

Late Filing Consequences

Missing the filing deadline or failing to pay required taxes can lead to penalties and interest charges. The District imposes a failure-to-file penalty of 5% of the unpaid tax per month, up to a maximum of 25%. If a corporation fails to pay the tax due, an additional failure-to-pay penalty of 0.5% per month applies, also capped at 25%.

Interest on unpaid taxes is assessed at the underpayment rate set by the Office of Tax and Revenue, compounded daily. If a return is more than 90 days late, the District may take enforcement actions, including issuing tax liens or revoking business licenses. Repeated noncompliance may trigger audits, leading to further scrutiny of financial records. Ensuring timely submission and payment of franchise taxes helps businesses avoid these consequences and maintain good standing with local tax authorities.