The Antio case refers to a Washington Supreme Court case (Antio LLC v. Department of Revenue) involving the Business & Occupation (B&O) Tax and how it applies to investment income in Washington State. Investment income includes gains realized from trading in stocks, bonds, or other evidences of indebtedness, interest income, dividends, and other investment related income without any deduction for losses.
If your business has or has had investment income like interest, dividends and capital gains not including capital losses, among others, you may need to analyze whether your company should have reported these items on your B&O tax return.
Clarifies the Definition of “Investment Income” for B&O Tax
- Before the Antio decision, there was uncertainty about how investment income was treated under Washington State’s B&O tax rules. Some businesses that primarily invest capital — like private equity firms or family offices — argued that their income should qualify for the tax deduction available to investment income.
- The Antio case made clear that only incidental investment income qualifies for the B&O tax deduction, not income generated as part of a business’s core activity of investing. Essentially, if your business is primarily involved in investing, rather than manufacturing, selling goods, or providing services, that income won’t be eligible for the investment deduction.
Narrowed Definition of “Incidental” Investment Income
- The Washington Supreme Court upheld the interpretation of “investment income” as being incidental to a business’s primary activity. The Court relied on the earlier 1986 ruling in O’Leary v. Department of Revenue, which said incidental investments usually involve surplus funds, not the core revenue-generating activity of a business.
- For example, if a company makes investments with surplus funds (e.g., from profits generated by its core business), that income could be eligible for the deduction. However, if the company’s main activity is investing — as in the case of private equity firms, hedge funds, or distressed debt investors — the income does not qualify for the deduction.
Investment Income Deduction Definition and Safe Harbor Threshold
- 2025 and earlier: The Department of Revenue will presume that an investment activity is not the main activity of a taxpayer if it is less than 5% of the taxpayer’s annual gross receipts. This constitutes a safe harbor. Taxpayers have the burden of proving an investment activity is not the main business activity if the income from the activity exceeds the safe harbor. If the investment activity income is greater than the 5% safe harbor, the taxpayer must establish that the income was generated from an incidental investment of their surplus funds. The taxpayer’s facts and circumstances at and prior to the time of filing will be relevant.
- Starting in 2026, if your investment income exceeds 5% of gross revenue, all investment income will be subject to B&O tax.
- The deduction does not generally apply to amounts received from loans, extension of credit, revolving credit arrangements, installment sales and similar interest income.
The deduction is not available to a banking business, lending business or security business.
Increased B&O Tax Liability for Investment Firms
- The ruling is likely to lead to higher B&O tax liabilities for businesses that focus primarily on investment activities. Since they can no longer claim the investment income deduction, they will face the full B&O tax on all income, including their investment earnings.
- This impacts hedge funds, private equity firms, trusts, family offices, and similar entities in Washington State. They will now have to pay B&O tax on all their investment-derived income, potentially increasing their overall tax bills significantly.
Strategic Changes for Structuring Investment Businesses
- Firms that rely on investments for a significant portion of their income may need to reassess their business structures, as this ruling impacts their tax planning. They might seek ways to separate their core operations from investment activities or consider alternative strategies to minimize their B&O tax burden.
- For instance, businesses could consider restructuring to move more of their investment operations into entities that are subject to different tax treatments, such as financial institutions or entities that qualify for different B&O tax provisions.
Potential for Lower Tax Burdens for Non-Investment Companies
- On the flip side, businesses with non-investment activities (e.g., retail, manufacturing, or service industries) might now have more clarity and lower compliance risks around B&O tax on their passive investment income. They can still claim the deduction for income from incidental investments, which means they can continue to benefit from this tax break without worrying about being treated as an investment entity.
Investment Income Voluntary Disclosure Program
If you did report investment income and took the investment deduction to offset the income reported, then you need to determine if that is the proper treatment under this new clarification.
If you did not report investment income on your B&O tax returns, you’ll want to determine if you should have under these new rules.
In both of the above situations, if your business had investment income in the past 4 years and does not qualify for the deduction, you should consider taking advantage of the temporary expanded Voluntary Disclosure Program. This program is for businesses with unreported investment income subject to B&O tax. It allows qualifying businesses to report that revenue without incurring penalties and/or interest.
Practical Implications and Takeaways for Businesses
- Classifying Income Correctly: Businesses in Washington State must carefully classify their income. If they are earning income from investment activities, they need to consider whether that income is related to their business operations or if it should be treated as passive income.
- Consulting with Tax Advisors: Given the complexity of the B&O Tax and its application to different types of income, businesses should work with tax advisors to ensure they are in compliance with state laws. Proper classification of income, as well as understanding any potential exemptions or deductions, is crucial.
If you have further questions or believe you may have unreported investment income, please reach out to us. We are here to help you!