Your business keeps the profits. You owe the tax. Washington’s income tax can reach an owner who receives less than $1 million in distributions—and that cash-flow consequence deserves a plain sentence in the voters’ pamphlet.
A separate rule also matters: spouses share one $1 million deduction. The pamphlet discloses that rule. It does not explain the retained-profit problem.
The business keeps the money. You pay the tax.
Your S corporation earns $1.5 million. You keep $800,000 in the company for payroll, a new location, or the next downturn, and distribute $700,000. Your federal K-1 says $1.5 million. Your federal AGI includes $1.5 million. After the $1 million Washington deduction, you have $500,000 of Washington taxable income and a bill of $49,500 before credits.
You received $700,000. Distribute $1 million instead and the bill is the same $49,500. The tax follows the allocation, not the cash.
Undistributed profit is income under federal law and under Washington’s new tax. The issue is cash flow: taxable income, distributions, and net worth are different numbers. The tax follows the first. An owner may owe tax even when the company needs the money for payroll, expansion, or debt obligations.
Two people, $700,000 each, one deduction
The $1 million standard deduction is per individual. Spouses and registered domestic partners are limited to $1 million combined, whether they file jointly or separately (ESSB 6346 §314). Two spouses who each own a business generating $700,000 of federal K-1 income have $1.4 million of combined federal adjusted gross income, one deduction, and $400,000 of Washington taxable income. Their bill is $39,600 before credits.
Neither of them individually earns $1 million. The ballot title says "annual individual income over $1,000,000." The statute says one deduction per couple. Those are not the same sentence.
The Legislature knew which unit it was choosing. Its own amendment to Initiative 2111 — the income-tax prohibition enacted by the Legislature in 2024 — carves out this tax "so long as the standard deduction is at least $1,000,000 for a household" (§1201). One million per household. Not per person.
What the ballot title says, and what the statute measures
Here is the certified ballot title, as it appears in the Secretary of State's public investment impact disclosure filing:
Initiative Measure No. IP26-645 concerns state and local taxes. This measure would repeal a 9.9% tax on annual individual income over $1,000,000; prohibit taxes measured by individual income and taxes on individual income or the receipt of individual income; and define "income."
The bill's own brief description on the Final Bill Report is shorter still: "Establishing a tax on millionaires."
The statute does something more specific. Beginning January 1, 2028, it imposes 9.9% on Washington taxable income (§201). Washington taxable income starts with federal adjusted gross income (§101), applies a short list of modifications to reach Washington base income, and subtracts the $1 million standard deduction (§314). Federal AGI includes your distributive share of every S corporation and partnership you own — the number on the K-1, whether or not the entity paid it out. That has been federal law for partnerships since the income tax began and for S corporations since 1958. What is new is a flat 9.9% state layer on that number, with a deduction that does not scale with how many people the business employs or whether you are married.
The Office of Financial Management's fiscal impact statement gets closer to the statute than the ballot title does — it describes "Washington taxable income greater than $1,000,000 per individual" — but says nothing about spouses sharing the deduction or about retained business profit.
The Attorney General's explanatory statement, which also runs in the pamphlet, does better than either. It says the tax is based on federal adjusted gross income "with some modifications," and that the $1,000,000 deduction applies "per household, so a married couple or domestic partnership shares a single $1,000,000 deduction."
Credit where due: the household rule is in the pamphlet, two documents past the ballot title.
The No campaign's own rebuttal, on the same page, says the tax "only applies to those making above one million dollars per year."
What none of the four documents — ballot title, fiscal impact statement, explanatory statement, arguments and rebuttals — says is the following:
The numbers
Simplified 2028 calculations. Full-year Washington residents; 100% ownership unless noted; no other income or deductions; no entity-level election; Washington modifications to federal AGI under §§301–309 assumed to be zero, so Washington base income equals federal AGI.
| Owner | Federal K-1 distributive share | Cash distributed | Standard deduction | WA taxable income | WA tax before credits |
|---|---|---|---|---|---|
| Spouses, one business each at $700K | $1,400,000 combined | $1,400,000 | $1,000,000 (shared) | $400,000 | $39,600 |
| S corp owner, retains $800K | $1,500,000 | $700,000 | $1,000,000 | $500,000 | $49,500 |
The S corporation owner received less than $1 million in cash. The married couple consists of two people who each earned $700,000. Both examples produce tax before credits.
What softens it, and by how much
The B&O credit. Section 204 allows a nonrefundable credit against the income tax for B&O or public utility tax paid on income included in both calculations; unused credit does not carry forward or back. Owners of pass-through entities claim their pro rata share of the entity's B&O tax under §402(2), measured by the K-1 percentage. Section 304(2) also requires an addback for B&O or public utility taxes deducted in computing federal AGI for which the credit is allowed. Calculate Washington income with that addback before applying the credit. It is a credit measured by a tax on gross receipts, applied against a tax on net income: for a thin-margin business it can offset most or all of the income tax, for a high-margin business a fraction.
Losses. Section 305 denies a Washington benefit for carryovers from tax years ending before 2028. For qualifying later Washington-apportioned NOL carryovers, only 80% of the amount deducted in federal AGI is deductible for Washington. An $800,000 federal deduction becomes $640,000 here—a $15,840 difference at 9.9% for an owner already above the standard deduction, before credits.
The entity-level election. A pass-through entity may elect to pay the 9.9% itself (§502). The election is annual and irrevocable once filed. It is due on the date DOR prescribes, no later than June 15 of the taxable year. Owners take a nonrefundable credit for their share of the entity's payment (§206) and add back the entity's tax expense to the extent it reduced their federal AGI. The reason to consider it is federal: under Notice 2020-75, a state tax paid by the entity is deductible in computing the entity's federal income, outside the individual SALT limitation. At a 37% marginal rate and full deductibility, the federal saving is about 37% of the payment — roughly 3.7 percentage points of the income taxed at 9.9%.
The unresolved question is how owners' $1 million deductions apply at the entity level. Section 502(3)(b) imports owner-level state modifications, supporting an argument for the deduction, but does not expressly settle its mechanics. If the deduction is unavailable, the entity could pay tax on income an owner could otherwise shelter, with excess owner credits lost because §206 allows neither refunds nor carryovers. Model total federal and Washington tax both ways using DOR's guidance as it becomes available.
Before 2028
The tax is law, effective January 1, 2028, unless voters repeal it on November 3 or a court strikes it down. Plan as if it arrives.
Timing.
Income recognized in 2027 is outside the tax; income recognized in 2028 or later is inside it, whenever the deal was signed. Federal AGI picks up installment, earnout, and escrow proceeds in the year they are recognized, so a 2027 closing with payments running into 2028 leaves those payments in the base. Where a transaction can legitimately close and be fully recognized in 2027, that is the year.
Model both routes.
Total federal plus Washington liability, with and without the entity election, using DOR's mechanics as they are published. Calendar DOR's election deadline, no later than June 15.
Tax distributions.
Size them to each owner's projected Washington liability after the deduction, credits, and any entity-level payment. Not 9.9% of profit: in the S corporation example, 9.9% of $1.5 million is $148,500; the projected tax is $49,500.
Salary versus K-1.
Paying yourself more W-2 compensation lowers the K-1 and raises wages by the same amount. Both are in federal AGI. It moves income between lines; it does not remove it.
Residency.
Moving does not end the tax by itself. You are a Washington resident if you are domiciled here — unless you kept no abode here all year, kept one elsewhere all year, and spent 30 days or fewer here — or if you are not domiciled here but keep a place of abode and are present more than 183 days (§101(8)).
Clear both tests and you are a nonresident — but a nonresident is still taxed on Washington-source income, and §402 sources a pass-through owner's distributive share to Washington to the extent the entity operates here. For a full-year nonresident, non-Washington-source income generally falls outside the base. Washington-source business income remains subject to tax.
Section 315 reduces the standard deduction for taxpayers who are not full-year residents, and §406 applies special allocation rules to a part-year resident's pass-through income. Model the year of the move separately.
Entity form.
A C corporation's retained earnings are not taxed to the owner. Conversion trades 9.9% on retained profit for 21% on all profit plus a second tax on dividends, which is why the pass-through form exists. It is rarely the answer, but for a business that reinvests nearly everything it deserves a model rather than a reflex.
The exception is the business reinvesting toward a sale. C corporation stock can qualify under §1202, and excluded QSBS gain is out of federal AGI and therefore out of the Washington base. S corporation stock never qualifies; the C corporation has to issue new stock, usually by contributing the business's assets to a new corporation, and the holding period runs from that issuance. How that works.
If you own a pass-through business with income near or above the deduction, the 2028 planning window is now. → Book a 20-minute call, or start with the Washington State Tax Planning Guide.
The sentence that's missing
The pamphlet explains the shared household deduction. It should be equally direct about business profits: an owner can owe tax on money the company kept.
That deserves a sentence.
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.
