Washington’s Capital Gains Tax: What Business Owners Should Know Before Selling

For owners of privately held businesses, selling a company is often the culmination of decades of work. Unfortunately, the amount received at closing and the amount ultimately retained after taxes can be substantially different.

Washington’s capital gains tax has added another consideration to the already complex process of structuring a business sale.

With tax rates now reaching 9.9%, business owners contemplating a sale should understand the potential consequences well before entering into negotiations.

What Is Washington’s Capital Gains Tax?

Washington first imposed a tax on certain long-term capital gains beginning in 2022. Effective January 1, 2025, the state adopted a two-tier tax structure:

·         7% on the first $1 million of Washington taxable capital gains.

·         9.9% on Washington taxable capital gains exceeding $1 million.

The $1 million threshold applies after determining taxable Washington capital gains, including applicable deductions and exemptions. The tax applies to individuals, not directly to corporations. However, owners of pass-through entities may incur liability on qualifying gains recognized through their ownership interests.

An Illustrative Example

Assume a Washington business owner sells an ownership interest and realizes $3 million in Washington taxable capital gains after applicable deductions and exemptions.

Taxable capital gain	Tax rate	Tax
First $1 million	7.0%	$70,000
Remaining $2 million	9.9%	$198,000
Total		$268,000

This is in addition to applicable federal taxes. The example illustrates why tax planning should begin before a business is offered for sale.

Not All Business Sales Are Taxed the Same Way

One of the most important considerations is the structure of the transaction. A business may be sold through a transfer of company stock or ownership interests, or through the sale of individual business assets. These alternatives can produce substantially different tax consequences.

For example, an asset sale may involve allocations to equipment, inventory, goodwill, and other assets. Some portions of the transaction may generate ordinary income rather than capital gains.

Washington’s capital gains tax also contains exemptions for certain assets, including qualifying depreciable business property and real estate. Consequently, the amount subject to Washington capital gains tax may differ substantially from the total gain recognized for federal income tax purposes.

A transaction that appears attractive based on its gross purchase price may be considerably less attractive after taxes are considered.

Are There Exemptions for Small Business Owners?

Yes. Washington provides a deduction for certain qualifying family-owned small businesses. However, the requirements are specific and include ownership, holding-period, participation, and other statutory qualifications. Not every privately held business qualifies.

A business owner who assumes that the deduction automatically applies could face an unpleasant surprise. Determining eligibility should be part of the initial tax planning process.

Can the Tax Be Reduced Through Advance Planning?

Potentially. Depending on the circumstances, planning opportunities may include:

Transaction Structure: Evaluating the tax implications of a stock sale versus an asset sale.

Purchase Price Allocation: Understanding how the purchase price will be allocated among different assets and how that allocation affects the seller.

Installment Sales: Evaluating whether qualifying installment-sale treatment can spread recognized gains over multiple tax years. Such arrangements also introduce credit risk and other considerations.

Ownership and Estate Planning: Reviewing ownership structure, succession objectives, and estate planning arrangements before negotiations begin.

Available Exemptions and Deductions: Determining whether the seller qualifies for specific federal or Washington tax benefits.

These strategies must be evaluated with qualified tax and legal advisors. What works for one transaction may be inappropriate for another.

Don’t Wait Until You Receive an Offer

One of the most common mistakes business owners make is waiting until they receive a letter of intent before evaluating the tax implications of a sale. By then, important elements of the transaction may already have been negotiated.

Changing the deal structure later can be difficult, particularly when the buyer and seller have conflicting tax objectives. The better approach is to coordinate tax planning, estate planning, business valuation, and transaction strategy before beginning the sale process.

The RC Advisory Perspective

At RC Advisory Services, we encourage business owners to begin preparing for a potential sale well before they intend to exit.

Understanding the potential value of a business is important. Understanding how transaction structure and taxes affect the seller’s ultimate proceeds is equally important.

Our role is to help owners prepare for and navigate the sale process while coordinating with their legal, tax, and financial advisors.

Considering an eventual sale of your business? We welcome a confidential, preliminary discussion about your objectives, the potential value of your company, and the steps that may improve the outcome of a future transaction.

This article provides general information and should not be considered tax or legal advice. Business owners should consult their CPA and attorney regarding their specific circumstances.