If you own a business structured as an S-corporation, LLC, or partnership, Washington's new 9.9% income tax (ESSB 6346) touches you differently than it touches a W-2 employee. Your income flows through a K-1, your business may already pay B&O tax on the same revenue, and the statute gives your entity an election to pay the income tax at the entity level — which creates a federal deduction that doesn't exist for individuals.
This post breaks down how ESSB 6346 applies to pass-through business income, how the entity-level tax election works, and what the B&O overlap means in practice.
(For an overview of ESSB 6346, see Washington's New Income Tax: What Founders, Investors, Athletes, and High Earners Need to Know. For the full tax landscape, see Washington State Taxes.)
How Pass-Through Income Gets Taxed
ESSB 6346 taxes individuals, not entities. But most high-earning business owners in Washington receive their income through pass-through entities — partnerships, LLCs taxed as partnerships, and S-corporations — that report income to owners on Schedule K-1.
Section 402 establishes how this works:
For Washington residents: Your distributive share of income, gains, losses, and deductions from a pass-through entity is included in your Washington base income — regardless of where the entity operates. If you're a Washington resident who owns 30% of a Texas-based partnership, your 30% share of that entity's income is Washington income. (§402(1), §401(1).)
For nonresidents: Only the Washington-source portion of your distributive share is taxable. "Sources within this state" means income from pass-through entities that operate in Washington, as determined under the allocation and apportionment rules in §405. (§402(1), §401(2).)
Modifications and credits flow through proportionally. If the entity has income that triggers a modification under §§302–308 (like capital gains or state/local tax deductions), your share of those modifications is computed based on your pro rata share — as reflected on the K-1. (§402(2).)
Guaranteed payments are treated the same as any other item of income that would be included in a participating owner's Washington base income. (§502(3)(c).) This means guaranteed payments to partners in a Washington-based firm are Washington-source income for nonresidents and are included in base income for residents.
The Entity-Level Tax Election (§502): The SALT Cap Workaround
This is probably the most consequential planning provision in ESSB 6346 for pass-through business owners.
The Federal Problem It Solves
Since 2018, the federal Tax Cuts and Jobs Act has limited the individual deduction for state and local taxes (SALT) to $10,000. For a Washington resident paying 9.9% on income above $1 million, the state income tax itself is not deductible against federal income tax beyond the $10,000 cap.
But if the entity pays the tax instead of the individual, the tax is a business expense — not a state income tax paid by the individual. The IRS confirmed in Notice 2020-75 that entity-level state taxes imposed on pass-through entities are not subject to the SALT cap. They're deductible as ordinary business expenses, reducing the entity's taxable income before it flows to the K-1.
Washington's §502 creates exactly this mechanism.
How the Election Works
Who can elect: Any pass-through entity (partnership, LLC, or S-corporation) can elect to pay Washington's income tax at the entity level. (§502(2)(a).)
How to elect: File an election with the Department of Revenue on or before a date prescribed by the department, but no later than June 15 of the taxable year. (§502(2)(a).)
Irrevocable: The election is irrevocable for the taxable year once filed. (§502(2)(b).)
Opt-out for individual owners: An election may exclude owners who choose not to participate. The entity must identify participating and nonparticipating owners at the time of election. (§502(2)(d).)
Tax rate: 9.90% — the same rate as the individual income tax. (§502(1)(a).)
What Income the Entity Pays Tax On
The taxable income of an electing entity consists of:
- The entire distributive share of income, gain, loss, and deduction attributable to participating resident owners, regardless of source. (§502(3)(a)(i).)
- The state source distributive share attributable to participating nonresident owners. (§502(3)(a)(ii).)
Taxable income is determined by applying all state-specific additions, subtractions, and modifications that would apply to the owners individually. (§502(3)(b).) Guaranteed payments, separately stated items, and investment income are included to the same extent they would be for an individual. (§502(3)(c).)
The Credit on the Owner's Return
Each participating owner receives a credit against their individual Washington income tax equal to their proportionate share of the tax paid by the electing entity. (§502(5)(a), §206.)
Here's the mechanical flow:
- The entity pays 9.9% on the participating owners' share of taxable income.
- The entity deducts that tax payment as a business expense on its federal return, reducing the K-1 income flowing to each owner.
- Each participating owner adds back their share of the entity tax expense to their Washington base income (§310 — this prevents a double benefit at the state level).
- Each participating owner claims a credit under §206 for their share of entity tax paid.
The net effect at the state level is a wash — you pay the same Washington tax either way. But at the federal level, you've converted a non-deductible individual state income tax into a deductible business expense. For someone in the 37% federal bracket, the federal tax savings from the entity-level election is 37% of the Washington tax paid — a substantial reduction in the effective cost of the new tax.
Example: The Math in Practice
Dr. Smith and Dr. Jones are equal partners in a medical practice structured as an LLC. The practice earns $3 million in net income. Each partner's K-1 shows $1.5 million.
Without the entity election:
- Each partner has $1.5 million of Washington base income.
- Each claims the $1 million standard deduction (§314 — $1M per individual; the combined deduction only applies to spouses and domestic partners, so unrelated business partners each get their own $1M).
- Each partner has $500,000 of Washington taxable income.
- Each pays 9.9% × $500,000 = $49,500.
- Total Washington tax: $99,000.
- Federal SALT deduction: limited to $10,000 each.
With the entity election:
- The LLC pays 9.9% on $3 million minus the applicable modifications (the entity computes taxable income as if each owner were filing individually, then aggregates).
- Assuming each partner's modifications net to a $1M deduction, the entity pays approximately $99,000.
- That $99,000 is a deductible business expense on the LLC's federal return.
- Each partner's K-1 income is reduced by $49,500 (their share of the entity tax).
- On their Washington returns, each partner adds back the $49,500 (§310) and claims a $49,500 credit (§206). State result: identical.
- Federal result: each partner saves 37% × $49,500 = $18,315 in federal taxes.
- Total federal savings for both partners: $36,630.
That's real money — and it recurs every year.
Important Limitations
The credit for other-state taxes (§203) reduces the §206 credit. If a resident owner also claims a credit under §203 for income taxes paid to another state on the same income, the §206 entity-level credit must be reduced accordingly. (§206.) You can't double-dip.
Estimated payments: The electing entity must make estimated tax payments on the same schedule as individuals under §501. These entity-level estimated payments are in lieu of individual estimated payments for the same income. (§502(4)(c).) No estimated payments are required before July 1, 2029. (§502(4)(d).)
Election timing: You must elect by June 15 of the tax year. Miss the deadline and you're stuck with individual-level payment for that year.
The B&O Tax Overlap
Washington already imposes its Business & Occupation (B&O) tax on gross receipts from business activity in the state. Unlike the income tax, B&O is levied on revenue — not profit. A business with $5 million in revenue and $500,000 in profit pays B&O on the full $5 million.
Starting in 2028, many pass-through businesses will pay both: B&O on gross receipts and income tax on net income. This is a genuine double layer, and the rates compound.
The §204 Credit: Partial Relief
Section 204 provides a nonrefundable credit against the income tax for B&O taxes and public utility taxes paid on income that is also subject to the income tax. The credit equals the amount of B&O tax (or public utility tax under chapters 82.04 or 82.16 RCW) paid on income that is included in both the B&O tax base and the income tax base.
This is meaningful but imperfect. The B&O tax is computed on gross receipts, while the income tax is computed on net income. The credit only applies to the extent the income is included in both calculations. For high-margin businesses (like professional services firms), the credit offsets a meaningful portion of the B&O tax. For low-margin businesses (like retail or manufacturing), the B&O tax on gross receipts will far exceed the income tax on thin margins, and the credit won't fully address the overlap.
Practical Impact by Business Type
Professional services (law firms, medical practices, consulting): High margins mean significant income tax exposure on top of B&O. The §204 credit helps, and the entity-level election provides a federal SALT deduction. These businesses should almost certainly elect entity-level payment.
Tech companies (S-corps): If the S-corp has significant Washington revenue and the owner's K-1 income exceeds $1 million, the income tax hits on top of B&O. Entity-level election is valuable here too. Note that if the company also has operations in other states, the K-1 income must be apportioned under §405 for nonresident owners.
Real estate (rental LLCs): Rental income flows through to owners on K-1. However, if the gains qualify for exclusion under the capital gains tax exemptions (RCW 82.87.050), the §302 modification may remove them from Washington base income. See Are Real Estate Gains Subject to Washington's New 9.9% Income Tax? for the details.
Retail and low-margin businesses: B&O tax remains the bigger burden. The income tax only applies if the owner's total income (including K-1 income from the business) exceeds $1 million. For many small business owners, the $1 million deduction will keep them below the threshold.
Nonresident Owners: Apportionment Under §405
If you're a nonresident who owns a share of a Washington pass-through entity, your income from that entity is taxed only to the extent it's derived from Washington sources.
Section 405 uses a receipts factor for apportioning business income: the fraction of the entity's total receipts that come from Washington sources (based on where goods are delivered or services are performed) determines what share of income is Washington-source income.
The receipts factor numerator includes Washington receipts; the denominator is total receipts everywhere. The detailed rules cover tangible personal property (delivered in state), services (performed in state), real property (located in state), and intangible property (used in state). (§405(3).)
For nonresident owners of multi-state businesses, this can significantly reduce Washington exposure. A nonresident who owns 50% of a firm with $4 million in income but only 20% of receipts in Washington would have only $400,000 of Washington-source K-1 income — well below the $1 million threshold.
Entity Structure Considerations
ESSB 6346 doesn't change the fundamental analysis of S-corp vs. LLC vs. partnership for most businesses. But it does add new factors:
S-corp reasonable compensation: S-corp owners who pay themselves a reasonable salary already split their income between W-2 wages and K-1 distributions. Both are included in federal AGI and flow through to Washington base income. The entity-level election under §502 applies to the K-1 portion, not the W-2 salary. The salary remains subject to the individual-level tax with no SALT workaround.
Multi-member LLCs and partnerships: These benefit most from the §502 election because all income flows through the K-1 (no W-2 salary split). The entire distributive share can be covered by the entity-level election.
Single-member LLCs: A single-member LLC is disregarded for federal tax purposes and doesn't file a partnership return. It's unclear whether a disregarded entity can make the §502 election — the statute defines "pass-through entity" as a partnership, LLC, or S-corporation that "reports out the distributive share of taxable income" to its owners (§101(7)). A disregarded entity doesn't file a separate return or issue a K-1. This is an area where DOR guidance will be needed.
C-corps: Not eligible for the §502 election (they're not pass-through entities). C-corp owners who take salary are taxed at the individual level on their W-2 income. Dividends are also included in AGI. But C-corps do pay their own entity-level taxes (federal corporate tax), and the corporate income is not directly included in the owner's Washington base income until distributed.
Who Should Consider the Entity-Level Election?
The PTE election is most valuable for owners of S corps, partnerships, and LLCs who have Washington income exceeding $1 million and are already at or near their federal SALT cap. Multi-owner professional firms — law firms, medical practices, accounting firms, and consulting firms — stand to benefit most. Founders with significant pass-through income from operating companies or investment partnerships should also model the election. The election is less impactful if you are well below the SALT cap and can already deduct your full Washington tax liability on your individual federal return.
Planning Takeaways
Make the §502 election. For virtually any pass-through entity with owners above the $1 million threshold, the entity-level election is a no-brainer. The state-level result is identical, and the federal savings are significant. The only reason not to elect would be if participating owners have complex multi-state situations where the §203 credit interaction creates complications.
Elect by June 15. The deadline is firm and irrevocable. Put it on the calendar now for 2028.
Model the B&O credit. Have your CPA model the §204 B&O credit for your specific business. High-margin service businesses will see meaningful relief; low-margin businesses less so.
Consider the owner mix. If your entity has both resident and nonresident owners, the election can be structured to include or exclude specific owners. Nonresident owners with minimal Washington-source income may prefer to opt out if their share of Washington income won't exceed $1 million after apportionment.
Track guaranteed payments separately. Guaranteed payments to partners are included in the entity-level tax computation under §502(3)(c). Make sure your entity's tax modeling captures these.
Don't forget estimated payments. The entity must make quarterly estimated payments starting July 1, 2029 (no estimated payments required before then). These replace the individual estimated payments for the covered income.
Need help evaluating the entity-level tax election or modeling the B&O overlap for your business? Book a 20-minute intro call to discuss your situation. Also see: Washington State Taxes Guide | Income Tax Planning Guide for High Earners
