Washington does not impose an income tax on partnerships

# Summary

Washington does not impose an income tax on partnerships, and for tax year 2025 imposes no broad income tax on a partner's distributive share.

Both halves of that sentence carry exceptions, and a partnership adviser needs all of them:

• The partnership itself owes business and occupation tax on gross receipts. Entity form does not avoid it and neither does operating at a loss.
• An individual partner owes Washington capital gains excise tax on long-term capital gains allocated to Washington, including gains flowing through the partnership, at 7 percent plus 2.90 percent above $1,000,000 from tax year 2025.
• From January 1, 2028, an individual partner is within the 9.90 percent Washington income tax on Washington taxable income above a $1,000,000 standard deduction. Distributive share income reaches that computation through federal AGI.

So Washington has no partnership income tax, taxes the partnership on turnover, and is in the process of taxing the partners.

# No entity-level income tax

Washington imposes no tax on partnership net income and requires no partnership income tax return. There is no Washington composite return, no nonresident withholding on distributive shares, and no pass-through entity tax election — for tax year 2025 there is no broad Washington income tax for such a regime to collect or to credit against.

The Final Bill Report for ESSB 6346 records the federal treatment the Washington tax is built on: "For federal income tax purposes, partnerships, limited liability companies, and certain corporations, referred to as S corporations, are considered disregarded entities. These entities are not taxed at the entity level and the various items of income, gains, losses, and expenses are passed through to the individual owners."

Washington's new income tax follows that pattern rather than displacing it: "Only individuals are subject to payment of the tax." It will reach partnership income in the partner's hands, not the partnership's.

# The partnership still owes B&O

RCW 82.04.220(1) levies the business and occupation tax "from every person that has a substantial nexus with this state ... for the act or privilege of engaging in business activities," measured "against value of products, gross proceeds of sales, or gross income of the business."

"Person" includes a partnership. There is no entity-form exemption, and because the measure is gross rather than net, a partnership with no distributable profit still owes the tax. Rates vary by the classification of the activity, and many Washington cities levy local B&O in addition.

This is the single most common error in treating Washington as a no-income-tax state for pass-throughs: the entity escapes an income tax it never faced and pays a turnover tax instead.

# Partners are taxed individually — now and more so from 2028

Capital gains, now. RCW 82.87.040(1) imposes an excise tax on the sale or exchange of long-term capital assets — 7 percent from January 1, 2022, plus "an additional excise tax ... beginning January 1, 2025 ... equal[ling] 2.90 percent multiplied by the portion of an individual's Washington capital gains exceeding $1,000,000." Only individuals pay it, so it lands on the partners rather than the partnership, and it reaches long-term gains realised through the partnership and allocated to Washington. A $250,000 standard deduction applies per individual, or in combination for spouses and domestic partners.

Income tax, from 2028. Per the Final Bill Report for ESSB 6346, "Beginning January 1, 2028, a 9.90 percent tax is imposed on the receipt of Washington taxable income. Only individuals are subject to payment of the tax. The first tax payments and returns begin in calendar year 2029." Washington taxable income starts from federal AGI — which already includes a partner's distributive share — subject to a $1,000,000 standard deduction per individual, and to modifications that exclude long-term capital gains and then add back those subject to the capital gains tax.

The practical consequence for planning: from tax year 2028, a Washington partner with more than $1,000,000 of Washington taxable income will face a state income tax on partnership income for the first time. The bill is null and void in its entirety if a court of final jurisdiction invalidates the tax, so the position is not yet settled.

# Coverage and verification

Tax years covered: 2025.

Verified on 2026-08-13 against the Washington Department of Revenue's "Income tax" page as then published, the Final Bill Report for ESSB 6346 (chapter 238, Laws of 2026), and RCW chapters 82.04 and 82.87 as published in this library.

The statements about the absence of a composite return, nonresident withholding, and a pass-through entity tax follow from the absence of a broad Washington income tax in the covered year rather than from a provision disclaiming them; no Washington authority establishing any such regime was found.

This determination carries status "not-imposed-with-exception" for two independent reasons: the entity owes B&O, and the partners are within the capital gains excise tax in the covered year. Re-verification is required before applying it to any year after 2025, and specifically before tax year 2028.

# Sources

Washington Department of Revenue, Income tax — https://dor.wa.gov/taxes-rates/income-tax

Final Bill Report ESSB 6346, ch. 238, Laws of 2026 — https://lawfilesext.leg.wa.gov/biennium/2025-26/Htm/Bill%20Reports/Senate/6346-S.E%20SBR%20FBR%2026.htm

RCW §§ 82.04.220, 82.87.040, 82.87.060, as published in this library.