Washington’s New 9.9% Income Tax: What Business Owners Need to Know

Washington business owners contemplating retirement or the eventual sale of their companies have another important tax consideration.

On March 30, 2026, Governor Bob Ferguson signed legislation establishing a new 9.9% state income tax on qualifying annual income exceeding $1 million. The new tax becomes effective January 1, 2028.

For individuals who expect substantial income from business operations or the sale of a company, the new law introduces additional considerations that should be evaluated well in advance.

How Does the New Income Tax Work?

Under Senate Bill 6346, Washington established a personal income tax with a standard deduction of $1 million. The tax rate is 9.9% on Washington taxable income exceeding the applicable deduction.

The $1 million standard deduction generally applies to an individual or married couple filing jointly. It is not doubled simply because two spouses file a joint return.

The new tax does not take effect until 2028, with initial returns generally due in 2029. Importantly, Washington taxable income is not necessarily identical to federal adjusted gross income. The legislation contains specific modifications, deductions, and credits.

How Could This Affect Business Owners?

Business owners may receive income from several sources, including:

• Salaries and bonuses.

• Distributions of business earnings.

• Income allocated through partnerships or S corporations.

• Proceeds from the sale of business interests or assets.

Not all these receipts are necessarily taxable under the new law, and distributions of previously taxed earnings may not generate additional taxable income. However, owners of profitable privately held companies should evaluate whether their annual income could exceed the new threshold.

A business sale may produce unusually high income in a single year, making advance planning especially important.

What About Washington’s Existing Capital Gains Tax?

Washington already imposes a capital gains tax of 7% to 9.9% on certain long-term capital gains. The new income tax legislation specifically addresses the interaction between these taxes.

Beginning in 2028, qualifying Washington capital gains may be included in the calculation of income subject to the new tax. However, the law also provides a nonrefundable credit against the new income tax for Washington capital gains taxes imposed for the same tax year.

A business owner should not simply add the 9.9% income tax to the 9.9% capital gains tax and assume that both rates will apply in full to the same gain.

The actual tax consequences will depend on the type of transaction, the character of the income, applicable deductions, and available credits. For example, a business sale may generate ordinary income as well as long-term capital gains. The two components may receive different treatment.

An Illustrative Example

Assume a Washington resident has $2 million in annual income that is fully included in Washington taxable income before application of the $1 million standard deduction.

Description	Amount
Income subject to calculation	$2,000,000
Standard deduction	($1,000,000)
Taxable income	$1,000,000
Tax at 9.9%	$99,000

This simplified example assumes no additional deductions, exclusions, or credits. If some of the income consists of Washington taxable capital gains, the actual calculation may be different because of the special treatment of capital gains and the related tax credit.

Should Business Owners Consider Accelerating a Sale?

Some owners may wonder whether completing a transaction before January 1, 2028, could produce a more favorable tax result. That possibility deserves consideration, but the answer is not necessarily straightforward.

The consequences depend on the owner’s circumstances, the structure of the transaction, and the nature of the income generated. A poorly negotiated sale undertaken primarily to meet a tax deadline could easily cost more than the anticipated tax savings.

A more appropriate approach is to evaluate the potential tax consequences as one component of a comprehensive exit strategy.

Planning Should Begin Before Negotiations

1. Understanding the Company’s Value: Establishing a realistic estimate of enterprise value provides a foundation for financial and estate planning.

2. Evaluating Transaction Structure: Stock sales, asset sales, and other transaction structures can produce different tax consequences.

3. Coordinating Professional Advisors: The company’s CPA, legal counsel, wealth advisor, and M&A advisor should understand the owner’s objectives before negotiations begin.

4. Considering the Timing of an Exit: Tax changes, business performance, market conditions, and personal circumstances should all be considered.

5. Reviewing Estate and Succession Plans: For many owners, the sale of a company is also a major estate planning event.

The RC Advisory Perspective

Selling a privately held company is rarely just a financial transaction. It often involves retirement planning, family considerations, estate planning, and decisions about the future of employees and the business itself.

At RC Advisory Services, we encourage owners to begin evaluating these matters well before they intend to sell. Our objective is to help business owners achieve successful transactions that reflect both their financial and personal goals.

If you are contemplating a sale within the next several years, an early conversation may help identify opportunities and avoid costly mistakes.

This article is for general informational purposes. The application of Washington’s new income tax will depend on individual circumstances and further administrative guidance. Consult qualified tax and legal advisors before making transaction or tax planning decisions.