The proposed WA State capital gains tax is back in the headlines this week. As you may recall, the tax was signed into law in 2021. Last year, a Douglas County judge struck down the law on the grounds that it violated the State constitution. The WA Attorney General then challenged the ruling, which brings us to this week, as the validity / constitutionality of the tax is being debated before the State Supreme Court in Olympia.
The law imposed a 7% tax on capital gains of more than $250,000 from the sale of stocks and bonds, excluding revenue from real estate and retirement accounts, among other exceptions.
So where does this factor in to the potential sale of a business? Owners considering the sale of their business are of course seeking to understand their “net” after a sale, inclusive of any taxes and transaction fees. In this case, the proposed capital gains tax, even if ruled constitutional, does NOT apply to the sale of a closely held business with revenue of $10M or less. This text is directly from the 3-page summary of the law on the WA Department of Revenue site:
A deduction is provided for the sale of substantially all of a qualified family-owned small businesses. A qualified family-owned business is a business where:
- the owner of the business held a qualifying interest for at least five years immediately before the sale or transfer of the business;
- the owner of the business or their family member materially participated in operating the business for at least five of the last ten years; and
- the business had worldwide gross revenue of $10 million or less in the 12-month period preceding the sale or transfer of the business—beginning with taxes due and payable in 2024, the $10 million amount is adjusted annually by inflation.
To summarize, if your revenue is $10M or less and you owned and worked in your business for 5+ years then the sale of your business is excluded from the new Washington State Capital Gains tax.
The Department of Revenue has published a good FAQs guide to the tax, check it out here:
Frequently asked questions about Washington’s capital gains tax | Washington Department of Revenue
I hope you are exhaling. I have had my CPA license now for 18 years, although my CPA status is inactive, I do enjoy following tax law and its impact on the small business community. On our site we explain more about our credentials, background, and expertise – it is our continuous, life-long investment in doing right by you and the community of business owners we serve.
If you would like more information on the Washington law, this write-up by a fellow CPA is the best overview we have come across of it.
Note the law was to take effect on January 1, 2022, and the first payments are due on or before April 17, 2023. This is, of course, in flux given the Douglas County ruling last year and the current WA Supreme Court review.
That is it for today – more to come in a future post. Please forward or share this content if you find it valuable. As always, thank you for reading!
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