C Corp vs S Corp in Washington

The Business and Occupation tax

The B&O tax is a gross receipts tax (not a net income tax). It applies to the gross revenue of the business, with limited deductions. Rates vary by classification:

• Retailing: 0.471 percent
• Wholesaling: 0.484 percent
• Manufacturing: 0.484 percent
• Services and other activities: 1.5 percent (2.0 percent for businesses with over $1M in service revenue, plus surcharges since 2020)
• Royalties: 1.5 percent

Small business credit: businesses with under $46,667 to $93,001 in monthly gross income (varies by activity) may receive a credit eliminating B&O liability. Above that, the full rate applies. The B&O is the same regardless of federal entity election: an S corp service business with $200,000 gross revenue pays $3,000 in B&O (1.5 percent), as does a C corp service business at the same revenue.

Source: Washington DOR B&O Tax

The 7% Washington capital gains tax

Effective 1 January 2022, Washington imposes a 7 percent tax on long-term capital gains exceeding $262,000 per individual (2024, inflation-adjusted; verify the 2026 threshold with the DOR). The tax applies to gains from the sale of stocks, bonds, business interests, and other intangibles.

Critically for founders, the capital gains tax does not conform to federal QSBS Section 1202. A Washington-resident founder selling QSBS for $10M may owe 7 percent Washington tax on the portion of gain exceeding the threshold, even though the federal gain is excluded.

Exemptions include sale of real estate (different from federal definition), certain qualified small businesses (Washington QSBS exemption with separate criteria), retirement accounts, and family-owned small businesses.

Source: Washington DOR Capital Gains Tax

What this means for the C vs S decision

Washington B&O is entity-neutral. The federal S vs C decision still applies normally. For most Washington owner-operators above $80,000 net profit, S corp election saves federal SE tax with no Washington state penalty.

For VC-track founders, Delaware C corp + Washington operations remains the standard path. The QSBS federal exclusion is preserved; the Washington 7 percent capital gains tax may apply to the post-exemption gain, reducing the QSBS advantage somewhat versus a Texas or Florida residence.