The Washington legislature recently passed ESSB 5096, which establishes Washington’s new capital gains tax. While this tax affects all Washingtonians, owners of certain types of small businesses should pay particular attention to what compliance with the new law will mean for their business.

The effects of ESSB 5096

ESSB 5096 changes the rate at which long-term capital assets are taxed. This tax only comes into effect if the profits from the sale of these assets is greater than $250,000 in any given year.

Under the terms of ESSB 5096, individuals who sell stocks, bonds, business interests and other long-term capital assets (including some types of tangible assets) must pay a 7% tax on that sale. Individuals are also responsible for the tax if they have ownership interest in a company that sells or exchanges these assets, or in a pass-through entity. The Washington legislature released a list of assets that will be exempt from this tax. These exempted assets include real estate, livestock, timber, assets subject to condemnation and some types of retirement accounts, among others.

What it means for small business owners

ESSB 5096 wnt into effect on January 1st, 2022. As of that date, it applies to individuals, not to most entities. However, if you are the owner of a pass-through entity, you will still have to report any gains made by your company that qualify for the tax personally, rather than reporting them for the business.

You should also be aware of how it will affect you personally and your officers and employees. The tax applies to stocks that you and your employees receive from an employee compensation plan.
If your business qualifies as a family-owned small business, and you sell it, you can deduct the price of the sale from your taxes. Your business would qualify if it grossed less than $10 million in the past year and you have been running the business yourself for the last five years.

It’s not easy keeping up with changes in laws and taxes. But when they have a substantial effect upon the way you run your business, it’s important to know what you have to do to comply with them – as well as how you can benefit from them.