For Washington Founders Approaching a Liquidity Event
A sequencing map: QSBS, domicile, capital gains, and the 2028 income tax — and the decisions that connect them.
Most exit-planning content treats QSBS, residency, and the new 2028 Washington income tax as separate topics. They aren't. The choices interact, and the order matters. This map shows the sequence — and where each decision lives in the existing literature on this site.
This is the planning map I give founders who walk into the office with a credible 12-to-36-month exit on the calendar — or who want to set up earlier-stage companies in a way that does not foreclose anything later. It pulls together work scattered across roughly 50 posts on this site into one sequenced framework. Each phase and decision links back to the underlying analysis.
On this page
The three forces in play
Every founder exit decision in Washington is a function of three variables. Lose track of any one and the math goes sideways.
Pillar 1 — QSBS
Federal exclusion subject to a per-issuer gain limit: generally the greater of $15M or 10× basis for post-July 4, 2025 acquisitions, with prior-use and transition rules.
Eligible stock acquired after July 4, 2025: 50% exclusion at 3 years, 75% at 4, 100% at 5. Earlier acquisitions generally require more than 5 years and use the legacy $10M-or-10×-basis limit. Original issuance, C-corp and active-business tests still apply; Washington currently follows.
WA conformity is statutory, not guaranteed — see "Where this is unsettled" below.
Pillar 2 — Washington tax
Capital gains tax now. Income tax starting 2028.
Capital-gains tax: 7% on Washington capital gains, plus 2.9% on the portion above $1 million, after applicable deductions. The $278,000 standard deduction is for tax year 2025; use the published amount for the relevant year. The new income tax begins in 2028 at 9.9% after statutory adjustments and deductions, with one starting $1 million standard deduction shared by spouses or registered domestic partners. Apply the §205 capital-gains credit rather than simply adding the two rates.
Pillar 3 — Timing
When you incorporate, when you move, when you close.
QSBS clocks. 183-day residency tests. June 15 PTE deadlines. The 2028 effective date. Almost every dollar saved in this space is saved by sequencing.
The five-phase map
Founder exit planning happens across roughly five phases. Each phase has its own decisions, deadlines, and downstream consequences. Skip a phase and the math compounds the wrong way.
Build the QSBS foundation
- Incorporate as a domestic C corporation (Delaware default). Only C-corp stock qualifies for §1202.
- Document original issuance, FMV and the start of the applicable QSBS holding period. Restricted stock and any §83(b) election require special attention.
- If making an 83(b) election, file within 30 days after the restricted-stock transfer, including an early exercise that transfers unvested shares. An ordinary unexercised option grant does not start this deadline.
- Document active-business status and the gross-assets test before and immediately after issuance: no more than $50M for stock issued through July 4, 2025, or $75M afterward, with inflation adjustments beginning in 2027.
Read more → LLC vs. C-corp · 83(b) election guide · QSBS eligibility checklist
Build the substantiation file. Layer estate planning.
- Annual QSBS substantiation: document gross assets, active-business activity, and any redemptions each year. Reconstruction at exit is dramatically weaker.
- Consider QSBS stacking through genuine gifts and qualifying non-grantor trusts before a sale becomes fixed. Separate taxpayer status, transfer rules, trust aggregation and assignment-of-income rules matter; multiplying the exclusion is not automatic.
- If married, evaluate the spousal exclusion rules. A joint return does not simply double the dollar limit; separate-return limits and ownership rules require review.
- Begin charitable trust setup if charitable giving is a long-term plan.
Read more → Annual QSBS substantiation · QSBS stacking strategies · Spousal exclusion · Gifting QSBS the right way
Pre-exit window. Domicile and entity moves.
- Residency planning if relocating: change domicile before the sale closes — RCW 82.87.100(1)(b) allocates stock gain by domicile at the time of sale — and stay out of statutory residency (RCW 82.87.020) for the year. For the 2028 income tax, analyze domicile, the separate statutory-residency test and part-year status. Nonresidents can still owe tax on Washington-source income. Domicile change checklist →
- Track Washington presence day by day. The non-domiciliary test requires a Washington abode and more than 183 days; fewer days do not defeat domicile. Apply the part-year rule separately.
- PTE election decision: Beginning with the 2028 tax, an eligible entity may elect under §502. File by the deadline prescribed by DOR, which the statute requires to be no later than June 15 of the taxable year. The election is annual and irrevocable for that year; identify participating and nonparticipating owners.
- Model installment sale vs. lump sum and the Roth conversion window before 2028.
- If charitable giving is on the plan, distinguish the two state deductions. The capital-gains deduction under RCW 82.87.080 applies only to qualifying donations above an indexed minimum ($250,000 statutory base), subject to an inflation-indexed annual cap ($100,000 statutory base). The separate §309 income-tax deduction begins with the 2028 tax and has a $100,000 cap shared by spouses or registered domestic partners.
Read more → Washington residency timing for QSBS · The 183-day rule · PTE election mechanics · Charitable deduction trap · Installment sales under ESSB 6346 · Roth conversions before 2028
Exit execution. The diligence file gets opened.
- Prepare the QSBS substantiation file, separating pre- and post-July 4, 2025 stock where relevant. An attestation letter can summarize the evidence for buyers and tax preparers; §1202 does not prescribe a universal eight-element letter.
- Confirm closing date relative to your statutory-residency day count if you have relocated.
- Consider an elected §1045 rollover for QSBS held more than six months, with replacement QSBS purchased during the 60-day period beginning on the sale date. Compare deferral with any available §1202 exclusion.
- Final entity housekeeping: redemption history, board minutes, cap-table snapshots.
Read more → What a QSBS attestation letter should document · Have one prepared (flat-fee) · Section 1045 rollover · Rollover planning when exit comes too soon
Reinvest. Fund trusts. Navigate the 2028 stack.
- If electing §1045, buy replacement QSBS within the statutory 60-day period. Deferred gain reduces replacement-stock basis, and the prior holding period generally carries over under §1223(13); it does not simply restart.
- Fund trusts established before the sale. Last-minute estate planning attracts IRS scrutiny.
- Compare charitable gifts across years using both state deductions and the federal limits. The capital-gains charitable deduction cannot be carried forward or backward. Section 309 separately limits the annual income-tax deduction to $100,000, shared by spouses or registered domestic partners. A gift produces no automatic state tax saving merely because it falls below a cap.
- Post-2028: navigate the new 9.9% Washington income tax on income above $1M. Capital gains tax paid generally credits against the new income tax under §205 of ESSB 6346, but the credit is non-refundable and won't cover every fact pattern.
Read more → §1045 vs §1202: two strategies · Washington income tax overview · ESSB 6346 explained
Four decisions worth slowing down for
These four crossroads have the largest dollar magnitudes in most Washington founder exits. None has a single right answer.
Should I move out of Washington before the sale?
Three days of physical presence can be the difference between zero Washington tax and a six- or seven-figure liability.
Yes, and there is time
Establish and document a genuine domicile change before closing; domicile at sale controls Washington stock-gain allocation. Separately examine the Washington-abode-plus-more-than-183-day test, part-year income-tax residency and Washington-source income.
Yes, but the sale is close
Late-stage moves are risky. The DOR is entitled to review where you actually were — cell-phone records, credit-card statements, calendar entries.
No, you're staying
The levers that remain are the PTE election, charitable timing, installment-sale structure, and QSBS optimization.
Should I make the §502 PTE election?
Compare the total federal and Washington tax cost with and without the election for each participating owner. Income above $1 million does not by itself establish a net saving. Entity tax, the owner’s usable credit, other income and deductions, and federal treatment all affect the result.
Potentially favorable — model the result
A qualifying entity-level payment can produce a federal deduction under IRS Notice 2020-75. Multiplying the payment by 37% assumes the deduction is usable at that marginal rate and ignores other interactions, including §199A. It is not a guaranteed net saving: compare the deduction benefit with any additional state tax, unused credits and compliance costs. Washington also requires the applicable PTE-tax addback under §310.
Maybe — multi-state owners
For a resident owner, §206 reduces the PTE credit by a §203 other-jurisdiction credit claimed on the same Washington taxable income. The PTE credit is nonrefundable, limited to tax otherwise due, and cannot be carried forward or backward. Model the credits together; the reduction does not apply merely because an owner has unrelated out-of-state income.
Often unfavorable — little usable owner credit
An owner with no Washington income-tax liability has no liability for the nonrefundable PTE credit to offset. A federal deduction may still arise, but does not establish an overall benefit from electing. Consider all income, the shared spousal deduction, residency adjustments and credits rather than K-1 income alone. Section 502(2)(d) permits owners to choose not to participate; the election must identify them.
Should I §1045 rollover or take the full exit?
An elected §1045 rollover can defer gain on QSBS held more than six months if replacement QSBS is purchased within the statutory 60-day period. Deferral, basis reduction and holding-period tacking require separate calculations.
Rollover
If eligible QSBS was held more than six months, compare reinvestment risk with the tax deferral available under §1045. Buy qualifying replacement stock within the 60-day period beginning on the sale date; unreinvested proceeds can leave recognized gain.
Take partial exclusion (post-OBBBA)
Eligible stock acquired after July 4, 2025 can receive 50% exclusion at 3 years and 75% at 4 years, subject to the gain limit. Apply holding-period tacking when determining acquisition date. Compare the remaining tax with rollover investment risk.
Take the sale proceeds
Claim any available §1202 exclusion and calculate tax on the remaining gain. Keeping the proceeds may be preferable to reinvestment; being below the cap alone does not establish eligibility or make the exit taxable.
Should I push to close before 2028 or accept the post-2028 stack?
The new 9.9% income tax above $1M starts January 1, 2028. Capital gains tax paid generally credits against it under §205, but the credit is non-refundable. Most founders cannot control closing timing precisely — but where you can, the pre-2028 window matters.
Push for pre-2028 close
A pre-2028 closing does not necessarily put every related payment outside the new income tax. Determine when wages, deferred compensation and pass-through income are recognized. Income properly recognized before 2028 is outside this new tax, but existing taxes still matter. Section 409A generally restricts accelerating deferred compensation; a desired tax date does not override the payment rules.
Optimize for the post-2028 stack
Compare a lump-sum sale with an eligible installment sale and model the PTE election separately. For Roth conversions, compare taxable conversion income, federal rates, other annual income, deductions and Medicare premiums across years. Converting before 2028 may avoid a Washington cost, but front-loading is not automatically better and conversions remain available afterward under current law.
Move before 2028
A genuine domicile change before a stock sale can change capital-gains allocation. For the new income tax, review statutory residency, part-year status and Washington-source income; moving does not automatically eliminate both taxes.
Common failure patterns
Most exit-planning mistakes are not legal errors — they are sequencing errors. A short list of the ones we see most often:
Where this is unsettled
The framework above synthesizes statutory text, agency guidance, and standard practice. Several elements remain open — worth flagging because the planning analysis differs depending on how each resolves.
- ESSB 6346 constitutionality. A challenge to the income tax was filed in Klickitat County Superior Court on April 9, 2026, alleging violations of Article VII’s uniformity and levy limits. In Quinn v. State (2023), the Washington Supreme Court upheld the capital-gains tax as an excise tax and expressly declined to reexamine Culliton. Quinn did not decide the validity of this later income tax. For planning, distinguish enacted law, the parties’ arguments and predictions about the outcome; check subsequent orders before relying on a litigation update.
- Statutory QSBS conformity in Washington. Federal §1202 exclusion currently affects Washington’s tax calculation; it is not a constitutional guarantee against future legislation. SB 6229 and HB 2292 proposed adding federally excluded §1202 gain to the capital-gains calculation. As checked September 9, 2026, neither bill’s official history records passage: SB 6229’s latest entry is a February 19 executive session with no action, and HB 2292’s is a January 27 public hearing. Future proposals and their effective dates must be evaluated separately from current law.
- "Substantially all" under §1202. The active-business and C-corp tests use a "substantially all" standard with no published percentage. Practitioner consensus accepts short or de minimis lapses; sustained non-qualifying periods are riskier. The IRS has not given bright-line guidance.
- Disregarded single-member LLC PTE election eligibility. ESSB 6346 §101(7) defines a pass-through entity as one that "reports out the distributive share of taxable income" — a disregarded entity does not file a separate return. Whether single-member LLCs can elect is unresolved; DOR guidance is pending.
- §204 B&O and public utility tax credit. Section 204 covers taxes paid under chapters 82.04 and 82.16 RCW on income included in both calculations. It does not include Seattle’s separate municipal B&O tax. The credit is nonrefundable and has no carryforward or carryback. Apply the statutory income-matching requirements and relevant guidance to entity-level payments; do not treat all B&O payments as interchangeable.
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This page is attorney advertising and is provided for general informational purposes only. It is not legal or tax advice, does not create an attorney-client relationship, and should not be relied upon for any specific situation. Tax laws referenced here are subject to change and pending litigation. Consult a qualified attorney or tax advisor about your own circumstances.
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