HB 1998
In CommitteeHouse
Investment income/B&O tax
Clarifying the scope of the investment income business and occupation tax deduction.
This status may be delayed. See Action History below for the latest updates.
How does a bill become law?
- Introduced: The bill is filed and assigned a number.
- Committee: A subject-matter committee holds hearings, takes public testimony, and decides whether to advance the bill.
- Floor Vote: The full chamber (House or Senate) debates and votes on the bill.
- Opposite Chamber: The bill repeats the committee and floor vote process in the other chamber.
- Governor: The Governor reviews the bill and decides whether to sign or veto it.
- Signed: The bill has been signed into law.
AI Analysis
This bill clarifies which types of investment and loan income businesses can deduct when calculating their Business and Occupation (B&O) tax in Washington. It responds to a recent court ruling that created uncertainty by narrowing how 'investment income' is interpreted, and aims to restore consistency with the law as it existed after 2002. The bill sets strict limits: only businesses with under 5% of gross receipts from investment or intercompany loan income may deduct those amounts — and financial institutions are excluded entirely.
- Clarifies that businesses can deduct investment income (e.g., dividends, interest on intercompany loans) from their B&O tax base — but only if total investment and loan income is less than 5% of gross receipts annually.
- Explicitly excludes from the deduction: income from loans (except certain intercompany loans), credit extensions, installment sales, factoring, and transferred receivables — unless they fall under the 5% threshold.
- Bars banks, lenders, and securities businesses from claiming the investment income deduction — even if their investment income is under 5% of gross receipts.
- Defines key terms like 'banking business,' 'lending business,' 'security business,' and 'factoring' to prevent ambiguity in applying the law.
- Confirms that the law applies retroactively to tax years beginning on or after January 1, 2022, but explicitly states it does *not* create a right to refunds for taxes paid before the law’s effective date.
- Reaffirms the legislature’s intent to preserve stability and fairness after a recent court decision (*Antio, LLC v. Department of Revenue*) created uncertainty about the scope of the investment income deduction.
Who is affected
- Businesses with investment income — Businesses that earn investment income (like dividends, interest, or loan income between related companies) and claim the Business and Occupation (B&O) tax deduction for such income — especially those in holding companies, family-owned businesses, or investment-focused entities.
- Financial institutions (banks, credit unions, etc.) — Banks, credit unions, and other financial institutions that currently cannot claim the investment income deduction — this bill reaffirms their ineligibility.
- Taxpayers seeking clarity on B&O tax deductions — Taxpayers who may have been uncertain whether their investment-related income qualified for the B&O tax deduction due to recent court rulings.
- State of Washington (Department of Revenue) — The state of Washington, which relies on B&O tax revenue — the bill aims to stabilize expected revenue by preventing broad interpretations of the investment income deduction.
Pro/Con Analysis
Stronger case for benefits
Potential Benefits (5)
Clarifies the scope of the investment income deduction, reducing litigation risk and administrative uncertainty for businesses and the Department of Revenue — promoting consistent tax treatment and reducing compliance costs over time.
Business & EmploymentRef: Sec. 2(1)(c) & (2)(a)Provides clear statutory definitions for 'banking business,' 'lending business,' and 'security business,' reducing ambiguity in enforcement and preventing strategic classification games by firms attempting to qualify for the deduction while operating as de facto financial institutions.
Business & EmploymentRef: Sec. 2(3)(a)-(f)By excluding financial institutions from the deduction, the bill helps prevent regulatory arbitrage where non-bank entities could mimic banking functions (e.g., offering loans, factoring) while enjoying preferential tax treatment — supporting fair competition and financial system integrity.
Public SafetyRef: Sec. 2(2)(b)Restores revenue stability for the state by preventing broad interpretations of the deduction that could erode the B&O tax base — this supports predictable funding for state services that local governments rely on, such as transportation and education grants.
Local GovernmentRef: Sec. 1 & 3The 5% threshold is designed to preserve the deduction for non-financial businesses that use modest intercompany lending for operational efficiency (e.g., manufacturing parent companies funding subsidiaries), aligning the deduction with the legislative intent of 2002 to support real business activity rather than passive income arbitrage.
Business & EmploymentRef: Sec. 2(1)(c)
Potential Concerns (5)
The 5% gross receipts threshold creates administrative complexity for mid-sized businesses that operate mixed models (e.g., manufacturing with ancillary intercompany lending), requiring them to track and apportion income streams precisely to avoid disallowance — increasing compliance costs without clear economic benefit.
Business & EmploymentRef: Sec. 2(1)(c) & (2)(a)The categorical exclusion of financial institutions from the deduction — even if their investment income is under 5% of gross receipts — prevents legitimate diversification strategies (e.g., credit unions offering member investment accounts) from being treated fairly, potentially distorting business structure decisions.
Business & EmploymentRef: Sec. 2(2)(b)Businesses with >5% investment/loan income (e.g., holding companies, family offices, some agribusinesses with financing arms) lose deductibility, increasing their effective B&O tax burden — this disproportionately impacts small-to-mid-sized family-owned enterprises that rely on internal capital reallocation, potentially reducing reinvestment in local operations.
Business & EmploymentLean peopleRef: Sec. 2(1)(c) & (2)(a)The retroactive application to 2022 — but explicit denial of refund rights for prior years — creates inequity for taxpayers who filed returns in good faith under prior interpretations, forcing them to absorb previously deducted amounts as additional tax liability without recourse.
FinancialRef: Sec. 3 (retroactivity clause)Some housing developers and real estate investment trusts (REITs) use intercompany loans to finance projects; if their loan income exceeds 5% of gross receipts (e.g., in years with high refinancing activity), they lose deductibility — potentially increasing project costs and reducing affordable housing supply.
HousingLean peopleRef: Sec. 2(1)(c)
Who Is Most Affected
Family-owned holding companies and multi-member LLCs that use intercompany loans to allocate capital across subsidiaries — many fall just above or below the 5% threshold; losing deductibility increases their tax liability and may reduce internal investment in Washington operations.
Credit unions and community banks that offer member investment accounts or small-scale lending may be classified as 'lending businesses' and thus barred from the deduction — even if their investment income is minimal — potentially reducing their capacity to offer low-cost loans to small businesses and homeowners.
Real estate developers and REITs that use intercompany loans for project financing may exceed the 5% loan income threshold in high-activity years, triggering loss of deductibility and increasing capital costs — this could reduce new construction, especially for affordable housing.
The state gains modest revenue stability and reduced audit complexity, while local governments benefit from more predictable intergovernmental revenue flows — but this comes at the cost of higher taxes for a subset of small-to-mid-sized businesses.
Large corporations with diversified income streams (e.g., tech firms with venture arms) that earn >5% from investments or intercompany loans may face higher B&O liability — but many can absorb this cost; the policy may discourage internal capital reallocation and favor external financing.