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.
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
Up to $15M per issuer excluded federally (post-OBBBA, stock issued after July 4, 2025).
Active business. Five-year hold (partial at 3 and 4). C-corp only. Original issuance. The savings show up on the federal return; Washington follows.
Pillar 2 — Washington tax
Capital gains tax now. Income tax starting 2028.
7% / 9.9% capital gains tax above the $278K deduction. New 9.9% income tax on individual income above $1M starting January 1, 2028. The two can stack.
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.
- Issue stock at original issuance with verifiable FMV — start the five-year QSBS holding-period clock.
- File 83(b) elections within 30 days of any restricted stock or option grant subject to vesting.
- Document active-business status and capitalize the company below the $50M / $75M gross-assets threshold.
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 irrevocable non-grantor trusts and family gifts — multiply the $15M exclusion before there is a known sale.
- If married, evaluate the spousal exclusion question (each spouse may get a separate cap, but the planning is nuanced).
- 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 both domicile and statutory residency under RCW 82.87.020 before the sale closes. Both tests apply independently — both must fail to escape.
- Track Washington physical presence day-by-day toward the 183-day cliff. Hard line, no proration.
- PTE election decision: S-corps, LLCs, and partnerships must file by June 15 of the tax year. Annual and irrevocable. Federal SALT-cap workaround.
- Model installment sale vs. lump sum and the Roth conversion window before 2028.
- If charitable giving is on the plan, lock in deductible giving and watch the $100,000 annual cap on the WA capital gains tax charitable deduction.
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 attestation letter — the eight required elements, including pre- and post-OBBBA tranche bifurcation if both apply. Buyers and tax preparers will not treat the gain as QSBS without it.
- Confirm closing date relative to your statutory-residency day count if you have relocated.
- Consider §1045 rollover if the sale would close before the five-year QSBS hold completes — reinvest within 60 days to preserve the clock.
- Final entity housekeeping: redemption history, board minutes, cap-table snapshots.
Read more → What a QSBS attestation letter must contain · Have one prepared (flat-fee) · Section 1045 rollover · Rollover planning when exit comes too soon
Reinvest. Fund trusts. Navigate the 2028 stack.
- If you used §1045, deploy proceeds into replacement QSBS within 60 days. New holding-period clock starts on the replacement stock.
- Fund trusts established before the sale. Last-minute estate planning attracts IRS scrutiny.
- Continue charitable giving on a multi-year schedule (the $100K WA charitable deduction is non-cumulative).
- 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 §204 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
Change domicile (home, voter registration, driver's license, accounts) and stay below 183 Washington days in the calendar year of sale. Both tests must fail.
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
Focus on PTE election, charitable timing, installment-sale structure, and QSBS optimization.
Should I make the §502 PTE election?
For most S-corps, LLCs, and partnerships with owners above the $1M threshold, this is a no-brainer — but the §203 credit interaction can complicate multi-state cases.
Yes — straightforward case
Single-state owners above $1M of K-1 income with no other-state credit complications. Federal savings ≈ 37% of WA tax paid.
Maybe — multi-state owners
If owners claim §203 credits for other-state taxes, the §206 entity credit must be reduced. Model carefully before electing.
No — only sub-$1M owners
Owners below the $1M threshold get no benefit. They can be excluded from the election (§502(2)(d)).
Should I §1045 rollover or take the full exit?
The rollover preserves QSBS treatment when the sale comes before the five-year clock — but only if reinvested in qualifying replacement stock within 60 days.
Rollover
Sale forced by acquisition or liquidity event before the five-year hold completes. Reinvest in another QSBS-eligible company within 60 days.
Take partial exclusion (post-OBBBA)
Stock issued after July 4, 2025 qualifies for 50% exclusion at 3 years and 75% at 4 years. May beat a forced rollover into untested stock.
Full taxable exit
If the gain falls below the §1202 cap or the post-tax economics work, the cleanest path is to just close.
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 §204, 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
Avoid the income tax stack entirely on items beyond capital gain (W-2 wages, deferred comp, ordinary K-1 income).
Optimize for the post-2028 stack
Use installment sales to spread gain across years, maximize PTE election value, and front-load Roth conversions in the 2026–2027 window.
Move before 2028
If you can change domicile and avoid the 183-day test in the year of close, both the capital gains tax and the new income tax disappear.
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. The Washington Constitution's uniformity clause (Article VII, §§ 1–2) is being challenged in Klickitat County Superior Court. The capital gains tax survived the analogous challenge in Quinn v. State (2023). The litigation on the income tax is at an early stage. Likely outcome: upheld. But not certain.
- Statutory QSBS conformity in Washington. Washington piggybacks on federal capital-gain treatment, so QSBS gain excluded federally is excluded by Washington. This is statutory, not constitutional. SB 6229 (2026) and HB 2292 (2026) both proposed to add QSBS back into the Washington base. Neither passed — but similar bills are likely to return.
- "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 credit mechanics. The credit against the income tax for B&O taxes paid is non-refundable and applies only to income included in both bases. The interaction with PTE-level B&O and with Seattle's separate B&O is awaiting DOR clarification.
Planning an exit, a move, or both?
We help Washington founders sequence QSBS, residency, capital gains, the 2028 income tax, and the planning windows that close around them. Flat-fee engagements after a short intake call.