Your business keeps the profits. You owe the tax.
Beginning January 1, 2028, Washington’s new income tax adds to that cash-flow problem for some business owners. You can receive less than $1 million in distributions and still owe the tax, because the calculation starts with income reported on your federal return—including business profits that stayed in the company.
For owners reinvesting in payroll, expansion, or reserves, that distinction matters.
A $49,500 tax bill on $700,000 in distributions
Suppose you own an S corporation with $1.5 million of profit allocated to you on your federal K-1. The company retains $800,000 and distributes $700,000.
Assuming no other income, deductions, or Washington modifications, the calculation is:
| Item | Amount |
|---|---|
| Business profit included in federal adjusted gross income | $1,500,000 |
| Washington standard deduction | −$1,000,000 |
| Washington taxable income | $500,000 |
| Washington tax at 9.9%, before credits | $49,500 |
| Cash distributed to you | $700,000 |
Distribute $1 million instead, and the tax remains $49,500. Keep more cash in the company, and the tax still remains $49,500.
The tax follows the allocated profit. The distribution determines how much cash you have available to pay it.
This simplified 2028 example assumes a full-year Washington resident, 100% ownership, no other income or deductions, no Washington modifications to federal AGI, and no entity-level election.
Why retained profits count
S corporations and LLCs taxed as partnerships generally pass their taxable income through to their owners. An owner’s share can enter federal adjusted gross income whether or not the business distributes the money.
Washington’s tax builds on that federal framework. Beginning January 1, 2028, the statute imposes a 9.9% tax on Washington taxable income. The calculation starts with federal adjusted gross income, applies Washington modifications, and subtracts the applicable standard deduction. See ESSB 6346 §§101, 201, and 314.
Undistributed profit is already income for federal tax purposes. Washington adds another tax obligation to that familiar arrangement.
The practical question is whether the business’s distribution policy will give owners enough cash to cover it.
A separate wrinkle: married couples share one deduction
Spouses and registered domestic partners share a single $1 million deduction, whether they file jointly or separately (§314).
Suppose two spouses each own a business generating $700,000 of federal K-1 income. Together, they have $1.4 million of federal adjusted gross income. Under the same simplifying assumptions:
- Combined income: $1.4 million
- Shared deduction: $1 million
- Washington taxable income: $400,000
- Washington tax before credits: $39,600
Neither spouse individually earns $1 million. Together, they exceed the household deduction.
This is a different issue from retained profits, but both affect how owners should estimate their exposure. Look at household income and expected distributions together.
What business owners should review before 2028
Start with the cash the owners will need and the cash the business can afford to distribute.
Tax distributions. Review your operating agreement, shareholder arrangements, and distribution practices. Estimate each owner’s Washington liability after the deduction, credits, and any entity-level payment. Simply multiplying K-1 income by 9.9% can overstate the obligation: in the example above, the projected tax is $49,500 before credits, rather than $148,500.
Income timing. A sale that closes in 2027 may still produce taxable income in 2028 or later through installment payments, earnouts, or other deferred proceeds. Model the character and recognition year of each payment. Capital gains have separate Washington rules under §302, and gain excluded under §1202 does not enter federal AGI.
Compensation. Paying yourself more W-2 compensation generally shifts income from the K-1 to wages. Both enter federal AGI; changing the label does not by itself remove the income from the calculation.
Residency. Moving requires a separate analysis. Both domicile and statutory residency matter, and nonresidents can owe tax on Washington-source pass-through income. Part-year residents also face different deduction and allocation rules (§§101(8), 315, 402, and 406).
Entity form. Retained C corporation earnings generally do not flow directly into shareholders’ personal income. But the corporation pays federal income tax, and distributions can produce a second tax for shareholders. Compare the combined burden, expected distributions, and exit plans before changing entity form. Potential §1202 eligibility deserves separate analysis; S corporation stock does not qualify.
Credits and elections can change the answer
The examples above show tax before credits. An actual projection needs to account for several additional rules.
B&O tax credits. Owners may qualify for a credit based on their share of entity B&O tax. A corresponding expense deducted in federal AGI must be added back as required by the statute. The credit is nonrefundable and cannot be carried forward or back (§§204, 304(2), and 402(2)).
Loss carryovers. Washington does not simply adopt every federal carryover deduction. Section 305 treats pre-2028 carryovers differently and limits qualifying later NOL carryovers. Current-year business losses are a separate question.
The pass-through entity election. An entity may elect to pay the tax itself, potentially producing a federal deduction and a Washington credit for participating owners. The Washington expense addback and nonrefundable owner credit affect the result (§§206, 310, and 502).
The interaction between that election and owners’ $1 million deductions requires particular care. Model the deduction treatment under applicable DOR guidance before electing. The election is annual and irrevocable once filed.
These provisions can change the amount due. Owners still need to plan how that amount will be funded.
The voters’ pamphlet should explain the cash-flow consequence
The ballot title describes a tax on “annual individual income over $1,000,000.” A business owner could read that and focus on the amount received from the company.
The Attorney General’s explanatory statement provides useful detail: it identifies federal adjusted gross income as the starting point and explains that married couples and domestic partners share one deduction.
The retained-profit issue deserves an equally direct explanation:
If you own an S corporation or an LLC taxed as a partnership, your taxable income can include business profits that were not distributed to you. You can owe this tax even if you receive less than $1 million in distributions.
That would help voters understand the tax and owners prepare for it.
Plan for the income—and the cash to pay the tax
For a pass-through business owner, a useful 2028 projection needs three numbers: your expected taxable income, your household’s available deduction, and the cash the business expects to distribute.
If the company plans to retain substantial profits, work through that projection before committing the cash elsewhere.
Own an S corporation or an LLC taxed as a partnership? Book a 20-minute call to discuss your 2028 planning, or start with the Washington State Tax Planning Guide.
Related Reading
- Does Washington Have a State Income Tax? Rates & 2028 Changes
- Initiative 645 Tracker: WA's 9.9% Income Tax Repeal
- Washington Income Tax Repeal: What Changes If It Passes
- How to Change Your Washington Domicile to Avoid the Income Tax
This post is for educational purposes only and is not legal or tax advice. Consult a qualified professional about your specific situation.
