Editor’s note: To read about AGC’s position on I-645, which will appear on the November ballot and would repeal Washington’s new income tax, please click here. If the tax remains in effect, AGC wants members to understand its implications. We thank AGC member Larson Gross for providing this important information.
Quick Tip 1: Know the Starting Line
Washington’s new 9.9% individual income tax begins January 1, 2028, with the first returns and payments generally due in 2029. For a construction-company owner, the $1 million threshold is not based on the company’s gross revenue, backlog, contract values, or annual billings. It is determined through the owner’s individual Washington tax calculation after applicable adjustments and the $1 million standard deduction.
Quick Tip 2: $1 Million of AGI Is Not the Whole Story
The calculation starts with federal adjusted gross income, but Washington then applies specific adjustments to determine Washington taxable income. For owners of S corporations, partnerships, or LLCs, the starting amount may include K-1 income, wages, guaranteed payments, investment income, and transaction proceeds. Construction owners should remember that project billings, work in progress, cash distributions, and taxable income are different measurements, so an owner may report taxable income even when cash remains in the business.
Quick Tip 3: One Large Project or Transaction Could Change the Picture
A contractor does not need to exceed the threshold every year to be affected by the new tax. A company sale, partner buyout, major claim settlement, large change order, project closeout, equipment disposition, or development transaction could cause income to rise sharply in a single year. Because the result may depend on whether the income is ordinary income, long-term capital gain, real-estate gain, or depreciation recapture, the tax impact should be modeled before the transaction terms are finalized.
Quick Tip 4: Moving Does Not Automatically Eliminate Washington Exposure
Moving an owner or relocating a company’s headquarters may change the Washington tax analysis, but it does not necessarily eliminate Washington tax exposure. A nonresident owner may continue to receive Washington-source income from a construction company operating or completing projects in the state. Residency, project locations, pass-through ownership, income sourcing, and transaction timing should therefore be evaluated together, especially before a company sale or other major income event.
Quick Tip 5: Real Estate Gains Receive Different Treatment—but Classification Matters
A direct sale of qualifying investment real estate may receive different Washington treatment from the sale of developed lots, spec homes, or other property held for sale in a construction or development business. The distinction also matters when a construction company owns its office, yard, shop, or development property. In a broader company sale, real estate, equipment, receivables, work in progress, contracts, backlog, and goodwill may each require separate tax treatment.
Quick Tip 6: The Best Planning Window Is Before the Deal
Tax planning is most useful before a letter of intent, purchase agreement, partner-redemption agreement, or other binding arrangement is signed. In a construction-company transaction, the allocation among real estate, equipment, work in progress, receivables, contract rights, and goodwill can materially affect the tax result. Early planning also gives owners time to consider transaction timing, entity structure, the pass-through entity tax election, tax distributions, working-capital needs, lender restrictions, and surety requirements. With the new tax beginning in 2028, construction owners still have time to assess its impact on upcoming projects, succession plans, and potential company sales.
These quick tips provide general educational information and are not legal or tax advice. The application of the law depends on each taxpayer’s specific facts, federal tax characterization, residency and sourcing rules, and future administrative guidance.