Starting July 1, Washington businesses have a unique opportunity to resolve unreported investment income subject to business and occupation (B&O) tax through a temporary, expanded voluntary disclosure program. The program is available in two phases:
- Phase 1: July 1, 2025 – April 30, 2026
- Phase 2: July 1, 2026 – April 30, 2027
Key Benefits for Businesses
- No Penalties or Interest: Qualifying companies can report unreported investment income without incurring penalties or interest.
- Limited Look-Back Period: Tax liability is limited to the prior four years plus the current year.
- Significant Penalty Relief: Up to 39% in penalties can be waived, including assessment, unregistered, and late payment penalties.
- Simplified Process: The Department of Revenue can summarize a company’s unreported tax liability in a single assessment.
- Broader Relief: The program applies to other income streams reportable on combined excise tax returns.
Who Qualifies
Any registered or unregistered business with unreported investment income, unless already under audit or enforcement as of July 1, 2025, is eligible for relief. Some exclusions apply, such as for companies engaged in banking, lending, and securities.
Background
In Antio LLC v. Wash. State Dep’t of Rev., the Washington Supreme Court ruled that the investment income deduction is available only if investments are incidental to a company’s main purpose (see our related Alert, State Supreme Court Decision Prompts Washington to Rethink Its B&O Investment Income Rules, on the decision).
In H.B. 2081, the state legislature made clarifying changes to the investment income deduction. The legislation codifies a 5% incidental threshold and clarifies that nonprofit organizations, collective investment vehicles, retirement accounts and recipients of distributions therefrom, and family investment vehicles (which includes some trusts) and recipients of distributions therefrom may deduct investment income even if the nonprofit, collective investment vehicle, retirement account, or family investment vehicle exceeds the threshold.
The expanded voluntary disclosure program was a response to S.B. 5167, which directed the Department of Revenue to implement an expanded voluntary disclosure program for all entities (other than banking, lending, or security companies) engaged in investment activities. The bill was part of a series related to the 2025-2027 biennial operating budget that Gov. Bob Ferguson signed in May (see our related Alert, Washington Governor Signs Biennial Operating Budget and Transportation Funding Bills to Make Important Tax Changes to B&O, Sales and Use, Capital Gains, and Estate Taxation).
BDO Insights
- In light of Antio and H.B. 2081, now is an ideal time for businesses that have claimed the investment income deduction or have not reported investment income to review their B&O tax filing methodologies. By reassessing their approaches, companies can identify potential exposures, uncover opportunities to reduce such exposures, and ensure compliance.
- This is a rare opportunity to come into compliance, limit tax exposures, and avoid costly penalties and interest.
Please visit BDO’s State & Local Tax Services page for more information on how BDO can help.