If you’re a new business owner in Washington State, the gross receipts tax (also known as “Business & Occupation tax” or “B&O tax”) you pay can seem a little tricky to understand. So for people new to business ownership, I want to provide a really quick overview of the basics.
Are You Subject to Washington B&O?
You are subject to B&O if you operate a business in Washington State. You pay the tax for the privilege of doing business in Washington State.
And a follow-up point, the state learns about your operating a business because you apply for a master business license with the state’s Department of Revenue. In fact, the master business license process should perhaps be retitled “sign up to pay business and occupation taxes”.
How Does the B&O Tax Work?
B&O works really simply. And that’s an advantage that is often ignored.
Mechnically, you simply pay a percentage of your gross receipts. Commonly, the percentage runs about .5%, or half a percent. But service businesses pay a 1.5% rate. And some businesses pay lower rates. (Click here to see the Department of Revenue’s current list of business and occupation tax rates.)
Example: If you operate a small professional services firm (say a consultancy) and the firm grosses $200,000 in revenue, you will owe 1.5%, or $3,000, in business and occupation taxes.
If you run a $1,000,000 manufacturing or wholesaling firm, you will owe .484%, or $4840, in business and occupation taxes.
Are There Deductions for B&O Tax?
You pretty much pay B&O on all your net in-state revenue. So that means you get to deduct returns, “never collected” money and out of state sales.
Example: If you run a business that generates $1,000,000 in revenue but $200,000 of this revenue gets earned in California and $100,000 gets earned in Oregon, Washington state can probably only tax you on the net $700,000 of Washington state revenue.
Example: If you have to return $50,000 of your Washington state revenue due to a customer dispute and you end up not collecting another $25,000 of your Washington state revenue because a customer simply can’t pay, you will end up paying taxes only on about $625,000 of Washington state revenue.
But note that (surprisingly) you can also pay B&O on things that aren’t really revenue. For example, in some cases, if you’re a partner in a business, though the partnership pays B&O on its revenue (because the partnership is running a business), if you receive part of your income in the form of a guaranteed payment from partnership, you may also need to pay B&O taxes on that.
Another example: Until October 1, 2013, a common paymaster arrangement in the state’s eyes created “fake” revenue the state thought it should be able to tax. (For more information about this recent rule change, refer here.)
Are There Credits for B&O Tax?
If you’ve got a service business doing less than about $56,000 in annual revenues or a manufacturing or retail business doing less than about $170,000, you can take a small business B&O tax credit to eliminate the B&O tax.
If you’re running a service business that does between (roughly) $56,000 and $112,000 in annual revenues or a manufacturing, wholesaling or retailing business that does between (roughly $170,000 and $340,000), you get a small credit that will wipe out part of the B&O tax you pay.
When Do I File a B&O Tax Return?
The deadlines for filing a B&O tax return vary depending on the size of your business.
For starters, if you’re not collecting sales tax and your revenues fall under a specified threshold ($28,000 for most businesses) you don’t need to file a B&O tax return at all.
If you exceed this threshold, you file either monthly, quarterly or annually. Specifically, if you’ll owe more than $4800, the state wants monthly returns (due by the 25th of the next month). If you’ll owe less than $1050, you owe an annual return (due by the 31st of January). Everyone else needs to file quarterly B&O tax returns (due by the last day of the month following the quarter’s end).
One other quick note: If you owe a monthly B&O tax return, you are required to file your return electronically.
Do You Want to Save Small Business Taxes?
Here’s something that I’ve noticed again and again about small businesses. They usually don’t do a very good job about maximizing their tax deductions.
More specifically, small business owners usually don’t go to the effort of structuring their business activities to protect legitimate deductions, to create new deductions and to recycle (or double-deduct) the deductions which can be used more than once to save taxes.
Which neatly brings me to my e-book, Small Business Tax Deduction Secrets. This 40pp e-book addresses this information short-fall by talking about how you can annually save thousands or even tens of thousands of dollars in taxes simply by more effectively using legitimate business deductions.
And a quick note: If you’re a client of our CPA firm, you don’t need to purchase this ebook. We will happily provide you with free copies of any of our books, including this one. Just ask for a copy next time you talk to us.