If your business already pays Washington B&O tax, you should account for that tax when estimating your Washington income tax bill. The new law provides a credit, and owners of pass-through businesses can receive their share.
There is also an addback. Understanding both steps matters.
The income tax is scheduled to begin January 1, 2028. This post explains the enacted rules. See the status tracker for litigation and other developments.
The credit reduces income tax
RCW 82A.04.120 allows a credit for Washington B&O tax paid on income included in both the B&O calculation and the income tax calculation. It also covers qualifying public utility tax.
The credit applies beginning with the 2028 tax year, with taxes due in 2029. It reduces the income tax bill. The business still owes its B&O tax.
The same-income requirement matters. You cannot automatically take every dollar on the business’s B&O return and subtract it from an owner’s income tax. B&O generally measures gross receipts; the income tax starts with federal adjusted gross income and applies Washington adjustments and deductions.
S corporation and partnership owners can receive the credit
The fact that the business paid the B&O tax does not, by itself, prevent the owners from receiving credit.
RCW 82A.04.420(2) expressly allocates relevant modifications and credits to partners, members, and shareholders. Its cross-reference includes the B&O credit. The allocation follows the owner’s pro rata share of net income or loss reflected on Schedule K-1.
For example, if a partnership has $40,000 of qualifying B&O credit and two partners each have a 50% share under that rule, each starts with a $20,000 share of the credit, subject to the individual limitation.
This credit is separate from the elective PTE income tax. Making the PTE election is not a condition stated in the B&O credit provisions.
The B&O deduction comes back into Washington income
B&O tax may already have reduced your federal AGI, either through your own business deduction or through lower K-1 income.
RCW 82A.04.230(2) requires an addition for federally deducted taxes for which the B&O or public utility tax credit is allowed. For a pass-through owner, the applicable modification is allocated under RCW 82A.04.420.
You calculate Washington income with that addback, apply the deductions and tax rate, and then apply the credit.
The addback does not reverse the federal deduction on your federal return. It changes the Washington calculation.
A $20,000 example
Assume a full-year Washington resident in 2028 has federal AGI of $1,980,000 after deducting $20,000 of B&O tax. Assume the full $20,000 qualifies for the credit, the owner receives the full $1 million standard deduction, and there are no other adjustments, deductions, credits, or PTE election.
| Calculation | Amount |
|---|---|
| Federal AGI after the B&O deduction | $1,980,000 |
| Add back credited B&O tax | +$20,000 |
| Washington base income | $2,000,000 |
| Standard deduction | −$1,000,000 |
| Washington taxable income | $1,000,000 |
| Income tax at 9.9% | $99,000 |
| B&O credit | −$20,000 |
| Washington income tax due | $79,000 |
The owner has $79,000 of income tax plus $20,000 of B&O tax, for $99,000 combined.
The credit reduces the calculated income tax by $20,000, but the addback increases the pre-credit tax by $1,980. Compared with a hypothetical calculation allowing the B&O deduction but providing no credit, the net state tax benefit is $18,020.
This example assumes eligibility for the entire credit. It illustrates the addback and credit mechanics; it does not determine how much of a particular business’s B&O payment qualifies.
The rate and standard deduction are in RCW 82A.04.030 and RCW 82A.04.360.
What to include in your estimate
The credit cannot exceed the income tax otherwise due. Unused credit produces no refund and cannot carry forward or backward. Also, the statute identifies state B&O tax under chapter 82.04 RCW; do not automatically include city B&O taxes.
Ask your preparer to show the qualifying B&O amount, your allocated share, the corresponding addback, and the usable credit. If your business will make the PTE election, coordinate that calculation as well.
For more, see the Washington income tax guide and the PTE election explanation.
General information, not legal or tax advice. Based on enacted law as of November 11, 2026.
