Here are the top 7 tax law changes — both state and federal — that Washington small business owners need to know about in 2025:
1. Increased B&O Tax Rates & Surcharges (HB 2081) 🚨
Effective Oct 1, 2025, Washington will raise B&O (Business & Occupation) rates across most industries and introduce a new surcharge on large employers — especially services, financial firms, and tech companies. Even small- to mid-sized businesses face higher costs on gross revenue, regardless of profitability.
2. Sales Tax Expansion to Services (ESSB 5814)
Starting October 2025, sales tax will apply to numerous previously untaxed services—advertising, software development, IT support, payment processing, and more. Small service firms in Seattle and statewide must update billing, invoicing, and checkout systems to remain compliant .
3. New B&O Tax Classification for Card Processing (HB 2020)
A new B&O rate category for payment card processing services comes into effect in 2026. Payment processors and businesses offering those services need to prepare for an additional excise component and potential deductions.
4. Capital Gains Tax Tweaks (SB 5813 & SSB 5314)
In 2025, Washington increased the capital gains tax from 7% to effectively 9.9% on gains over $1 million. Changes also include improved documentation rules for 1099-B reporting and a state capital gains credit replacing the old B&O deduction credit.
5. Elimination of the Employee Ownership Program (SHB 2047)
Starting July 2026, Washington will sunset its Employee Ownership trust program that allowed businesses to receive B&O credits for offering shares to employees.
6. New Taxes on Zero‑Emission Vehicle (ZEV) Credits (SHB 2077)
A new excise tax on ZEV credits—those earned by selling or banking EV credits—is effective May 2025. If your small business deals in clean tech or EV incentives, take note Washington Department of Revenue.
7. Federal Pass‑Through Deduction (One Beautiful Bill Act)
Nationally, the 20% Qualified Business Income (QBI) deduction for pass-through businesses like S-Corps and LLCs was made permanent in July 2025 under the “One Big Beautiful Bill” Act. This federal boost helps reduce taxable income for small business owners.
Of course, brief digression as this gets into some heated debates. Here’s the pros and cons of this bill:
🟢 Supporters say:
- It made permanent the 20% Qualified Business Income (QBI) deduction for pass-through entities (like S Corps and LLCs), a popular tax break for small business owners.
- It simplified some federal filing requirements for freelancers and gig workers.
- It aimed to stimulate small business growth by preserving deductions and extending bonus depreciation provisions.
🔴 Critics argue:
- The bill disproportionately benefits high-income business owners, including real estate investors and larger pass-throughs.
- It adds to the federal deficit, with some estimates putting its 10-year cost over $700 billion.
- It limits offsetting tax credits in other areas (such as green energy or low-income housing) to pay for its provisions.
- Critics say the bill’s name was more marketing than substance, making it harder for the public to debate its contents seriously.
🟡 For Washington State small businesses:
While it can lower taxable income, the real value depends on how your business is structured and whether you meet income and wage thresholds to qualify. Not all businesses are eligible or benefit equally, and in some cases, a C Corp might now be more favorable depending on your goals.
If you’re considering restructuring or unsure how the QBI deduction or other aspects of the OBBB affect your taxes, it’s a good time to consult with a tax professional to model out the best path.
✅ Bottom Line for Washington SMB Owners:
| Change | Action Steps |
|---|---|
| Recordkeeping | Track all revenue streams meticulously—especially service sales and capital gains. |
| Invoicing Systems | Update systems to reflect new sales tax on services and B&O card-processing categories. |
| Entity Planning | Evaluate entity types—LLC, S-Corp—as QBI deduction now permanent. |
| Cap Gains Strategy | Prepare for elevated capital gains rates; ensure documentation is in order. |
| EV Credit Awareness | Understand new excise tax if participating in ZEV credit transactions. |
| Monitor Future Changes | Stay informed on evolving payroll or state-level taxes that may impact operations. |
What Should You Do?
- Consult a CPA – These shifts are complex and a proactive tax advisor can help you save.
- Update Billing & Bookkeeping – Ensure your systems reflect all new taxes and deductions.
- Plan Business Entity Structure – Confirm if you’re optimizing for QBI and state-level tax efficiency.
Want to navigate these updates confidently? Huddleston Tax CPAs specializes in supporting Seattle and Washington State small business owners—bookkeepers, consultants, service providers—helping you realign for post-2025 tax compliance and optimization.