Washington State Capital Gains Tax Issues for Family Businesses

Beginning January 1, 2022, Washington state will impose a 7 percent capital gains tax on annual long-term capital gains that exceed a $250,000 annual threshold.

Individuals subject to the tax are Washington state residents, as well as nonresidents who sell tangible personal property located in Washington at the time of the sale.

The tax will not be levied against business entities. Rather, the individual taxpayers who are owners of pass-through and disregarded entities for federal income tax purposes will be assessed the tax on the sale of qualifying property by the entity. The tax also applies to the sale of interests in family businesses by individual owners who are Washington residents. There are various classes of assets exempt from the new tax, including all real estate.

A piece of good news for some family businesses is that the new law includes a deduction against the tax for the sale of qualifying family-owned small businesses. A "family-owned" (as defined in the legislation) small business is one that has $10 million or less in gross worldwide receipts in the 12 months immediately preceding the sale.

A qualifying sale is one that involves 90 percent or more of the assets of the business, or 90 percent or more of the individual taxpayer's interest in the business. The deduction is limited to gains that would otherwise be included as Washington capital gains.

If your business does not qualify for the family-owned small business deduction, you might consider accelerating the sale of all of your family business, or a portion thereof if you intend on engaging in business succession planning, prior to the new law's January 1, 2022, effective date, thereby avoiding the new tax altogether. Alternatively, individual business owners may wish to consider a residency change prior to any sale of their business which does not qualify for the deduction.

This new tax has obvious impacts on family businesses. It is not unreasonable to expect that the new tax and its January 1, 2022, effective date may result in a rush of sales of family businesses this year. Prompt advance planning will be required to complete those sales prior to year-end.

For more information on the new Washington capital gains tax, review our recent advisory.