Effective Date of Rule: Thirty-one days after filing.
Purpose: WAC 458-20-104 explains the small business B&O tax credit. WAC 458-61A-202 applies to transfers of real property by inheritance or devise which are not subject to the real estate excise tax.
These rules are being amended for the sole purpose of implementing E2SB 5688 (chapter 521, Laws of 2009). E2SB 5688 requires agencies to "amend their rules to reflect the intent of the legislature to ensure that all privileges, immunities, rights, benefits, or responsibilities granted or imposed by statute to an individual because that individual is or was a spouse in a marital relationship are granted or imposed on equivalent terms to an individual because that individual is or was in a state registered domestic partnership."
Citation of Existing Rules Affected by this Order: Amending WAC 458-20-104 Small business tax relief based on income of business and 458-61A-202 Inheritance or devise.
Statutory Authority for Adoption: E2SB 5688 (chapter 521, Laws of 2009).
Adopted under notice filed as WSR 10-04-022 on January 26, 2010.
Number of Sections Adopted in Order to Comply with Federal Statute: New 0, Amended 0, Repealed 0; Federal Rules or Standards: New 0, Amended 0, Repealed 0; or Recently Enacted State Statutes: New 0, Amended 2, Repealed 0.
Number of Sections Adopted at Request of a Nongovernmental Entity: New 0, Amended 0, Repealed 0.
Number of Sections Adopted on the Agency's Own Initiative: New 0, Amended 2, Repealed 0.
Number of Sections Adopted in Order to Clarify, Streamline, or Reform Agency Procedures: New 0, Amended 0, Repealed 0.
Number of Sections Adopted Using Negotiated Rule Making: New 0, Amended 0, Repealed 0; Pilot Rule Making: New 0, Amended 0, Repealed 0; or Other Alternative Rule Making: New 0, Amended 0, Repealed 0.
Date Adopted: April 15, 2010.
Alan R. Lynn
AMENDATORY SECTION(Amending WSR 04-14-052, filed 6/30/04, effective 7/31/04)
WAC 458-20-104 Small business tax relief based on income of business. (1) Introduction. This rule explains the business and occupation (B&O) tax credit for small businesses provided by RCW 82.04.4451. This credit is commonly referred to as the small business B&O tax credit or small business credit (SBC). The amount of small business B&O tax credit available on a tax return can increase or decrease, depending on the reporting frequency of the account and the net B&O tax liability for that return. This rule also explains the public utility tax income exemption provided by RCW 82.16.040. The public utility tax exemption is a fixed amount, or threshold, based on the reporting frequency assigned to the account. Readers should refer to WAC 458-20-22801 (Tax reporting frequency -- Forms) for an explanation of how the department of revenue (department) assigns a particular reporting frequency to each account. Readers may also want to refer to WAC 458-20-101 for an explanation of Washington's tax registration and tax reporting requirements.
This rule provides examples that identify a number of facts and then state a conclusion regarding the applicability of the income exemption for the public utility tax or small business B&O tax credit. These examples should be used only as a general guide. The tax results of other situations must be determined after a review of all facts and circumstances.
(2) The public utility tax income exemption. Persons subject to public utility tax (PUT) are exempt from payment of this tax for any reporting period in which the gross taxable amount reported under the combined total of all public utility tax classifications does not equal or exceed the maximum exemption for the assigned reporting period. The public utility tax exemption amounts are:
|for taxpayers reporting monthly . . . . . . . . . . . .||$2,000 per month|
|for taxpayers reporting quarterly . . . . . . . . . . . .||$6,000 per quarter|
|for taxpayers reporting annually . . . . . . . . . . . .||$24,000 per annum|
(b) How does the exemption apply if a business does not operate for the entire tax reporting period? The public utility tax maximum exemptions apply to the entire tax reporting period, even though the business may not have operated during the entire period.
(c) Do taxable amounts for B&O tax or other taxes affect this exemption? The public utility tax exemption is not affected by taxable amounts reported in the B&O tax section or any of the other tax sections of the tax return.
(d) Example. Taxpayer registers with the department and is assigned a quarterly tax reporting frequency. Taxpayer begins business activities on February 1st. During the two months of the first quarter that the taxpayer is in business, taxpayer's public utility gross income is seven thousand dollars. After deductions provided by chapter 82.16 RCW (Public utility tax) are computed, the total taxable amount is five thousand dollars. In this case, the taxpayer does not owe any public utility tax because the taxable amount of five thousand dollars is less than the six thousand dollar exemption threshold for quarterly taxpayers. The fact that the taxpayer was in business during only two months out of the three months in the quarter has no effect on the threshold amount. However, if there were no deductions available to the taxpayer, the taxable amount would have been seven thousand dollars. The public utility tax would then have been due on the full taxable amount of seven thousand dollars.
(3) The small business B&O tax credit. Persons subject to the B&O tax may be eligible to claim a small business B&O tax credit against the amount of B&O tax otherwise due. The small business B&O tax credit operates completely independent of the public utility tax exemption described above in subsection (2) of this rule. RCW 82.04.4451 authorizes the department to create a tax credit table for use by all taxpayers when determining the amount of their small business B&O tax credit. Taxpayers must use the tax credit table to determine the appropriate amount of their small business B&O tax credit. A tax credit table for each of the monthly, quarterly, and annual reporting frequencies is provided in subsection (7) of this rule. The statute provides that taxpayers who use the tables will not owe any more tax than if they used the statutory credit formula to determine the amount of the credit.
(a) How is the credit applied if a business does not operate during the entire tax reporting period? The small business B&O tax credit applies to the entire reporting period, even though the business may not have been operating during the entire period.
(b) Can a husband and wife or partners in a state
registered domestic partnership both take the credit? Spouses
or state registered domestic partners operating distinct and
separate businesses are each eligible for the small business
B&O tax credit. For both spouses or both domestic partners to
qualify, each must have a separate tax reporting number and
their)) his or her own business tax returns.
(c) How do I determine the amount of the credit? Taxpayers eligible for the small business B&O tax credit must follow the steps outlined in subsection (5) of this rule to determine the amount of credit available. Taxpayers who have other B&O tax credits to apply on a tax return, in addition to the small business B&O tax credit, may use the multiple B&O tax credit worksheet in subsection (4) of this rule before determining the amount of small business B&O tax credit available. Subsection (7) of this rule contains the tax credit tables that correspond with the monthly, quarterly, and annual reporting frequencies.
(d) Can I carryover the small business B&O tax credit to future tax reporting periods? Use of the small business B&O tax credit may not result in a B&O tax liability of less than zero, and thus there will be no unused credit.
(e) Do I have to report and pay retail sales tax even if I do not owe any B&O tax? Persons making retail sales must collect and pay all applicable retail sales taxes even if B&O tax is not due. There is no comparable retail sales tax exemption.
(4) Multiple business and occupation tax credit worksheet. The small business B&O tax credit should be computed after claiming any other B&O tax credits available under Title 82 RCW (Excise taxes). Examples of other B&O tax credits to be taken before computing the small business B&O tax credit include the multiple activities tax credit, high technology credit, commute trip reduction credit, pollution control credit, and cogeneration fee credit. The following multiple B&O tax credit worksheet describes the process taxpayers must follow to apply credits in the appropriate order. Refer to subsection (6) of this rule for an example illustrating the use of the multiple B&O tax credit worksheet.
(5) Using the tax credit table to determine your small business B&O tax credit. The following steps explain how to use the small business B&O tax credit table:
(a) Step one. Determine the total B&O tax amount due from the excise tax return. This amount will normally be the total of the tax amounts due calculated for each classification in the B&O tax section of the excise tax return. However, if additional B&O tax credits will be taken on the return, refer to subsection (4) of this rule and the multiple B&O tax credit worksheet before going to step two.
(b) Step two. Find the small business B&O tax credit table that matches the assigned reporting frequency (i.e., the monthly table shown in subsection (7)(b) of this rule, the quarterly table in subsection (7)(c) of this rule, or the annual table in subsection (7)(d) of this rule).
(c) Step three. Find the "If Your Total Business and Occupation Tax is" column of the tax credit table and come down the column until you find the range of amounts which includes the total B&O tax due figure obtained from the excise tax return or multiple B&O tax credit worksheet.
(d) Step four. Read across to the "Your Small Business Credit is" column. The figure shown is the amount of the small business B&O tax credit that can be claimed on the "Small Business B&O Tax Credit" line in the "Credits" section of the excise tax return.
(6) Example. ABC reports quarterly. This quarter, ABC reports one hundred ninety dollars under the wholesaling classification and seventy dollars under the manufacturing classification for a total B&O tax liability of two hundred sixty dollars. ABC completes Schedule C, and determines it is entitled to a multiple activities tax credit (MATC) of seventy dollars. Using the multiple B&O tax credit worksheet, ABC enters two hundred sixty dollars on line one, enters seventy dollars on line two, and enters one hundred ninety dollars on line three (line two subtracted from line one). Line three, one hundred ninety dollars is the total B&O tax. ABC will use this amount to determine whether it is eligible for a small business B&O tax credit.
(7) Tax credit tables. Corresponding tax credit tables for the monthly, quarterly, and annual reporting frequencies appear below. Taxpayers must use the tax credit table that corresponds to their assigned reporting frequency to determine the correct amount of small business B&O tax credit available.
(a) Example illustrating the use of the small business B&O tax credit tables. The facts are the same as in the previous example in subsection (6) of this rule. After completing the multiple B&O tax credit worksheet, ABC has one hundred ninety dollars of B&O tax liability left for potential application of the small business B&O tax credit. ABC refers to the quarterly small business B&O tax credit table, which is located below in subsection (7)(c) of this rule, and finds the "If Your Total Business and Occupation Tax is" column. Following down that column, ABC finds the tax range of one hundred eighty six to one hundred ninety one dollars and comes over to the "Your Small Business Credit is" column, which shows that a credit in the amount of twenty-five dollars is available. Before calculating the total amount due for the tax return, ABC enters its small business B&O tax credit of twenty-five dollars in the "Credits" section.
(b) Monthly filers. Persons assigned a monthly reporting frequency must use the following table to determine if they are eligible for a small business B&O tax credit.
|If Your Total Business and Occupation Tax is:||Your Small Business Credit is:|
|At Least||But Less Than|
|$0||$36||The Amount of Business and Occupation Tax Due|
(c) Quarterly filers. Persons assigned a quarterly reporting frequency must use the following table to determine if they are eligible for a small business B&O tax credit.
|If Your Total Business and Occupation Tax is:||Your Small Business Credit is:|
|At least||But Less Than|
|$0||$106||The Amount of Business and Occupation Tax Due|
(d) Annual filers. Persons assigned an annual reporting frequency must use the following table to determine if they are eligible for a small business B&O tax credit.
|If Your Total Business and Occupation Tax is:||Your Small Business Credit is:|
|At Least||But Less Than|
|$0||$421||The Amount of Business and Occupation Tax Due|
[Statutory Authority: RCW 82.32.300 and 82.01.060(2). 04-14-052, § 458-20-104, filed 6/30/04, effective 7/31/04. Statutory Authority: RCW 82.32.300. 98-16-019, § 458-20-104, filed 7/27/98, effective 8/27/98; 97-08-050, § 458-20-104, filed 3/31/97, effective 5/1/97; 95-07-088, § 458-20-104, filed 3/17/95, effective 4/17/95; 83-07-034 (Order ET 83-17), § 458-20-104, filed 3/15/83; Order ET 70-3, § 458-20-104 (Rule 104), filed 5/29/70, effective 7/1/70.]
AMENDATORY SECTION(Amending WSR 08-24-095, filed 12/2/08, effective 1/2/09)
WAC 458-61A-202 Inheritance or devise. (1) Introduction. Transfers of real property by inheritance or devise are not subject to the real estate excise tax. For the purpose of this exemption, it does not matter whether the real property transferred was encumbered by underlying debt at the time it was inherited or devised.
(2) Nonpro rata distributions. A nonpro rata distribution is one in which the transfer of real property to the heirs or devisees may not be in proportion to their interests. For example, Aunt Mary wills her entire estate equally to her three nieces. The estate consists of her primary residence, a cottage at the ocean, and significant cash assets, among other things. Rather than take title to the two parcels of real estate in all three names, the estate may be distributed by deeding the primary residence to Meg, the oceanfront property to Beth, and the majority of the cash assets to Jo. Such distribution by a personal representative of a probated estate or by the trustee of a trust is not subject to the real estate excise tax if the transfer is authorized under the nonintervention powers of a personal representative under RCW 11.68.090 or under the nonpro rata distribution powers of a trustee under RCW 11.98.070(15), if no consideration is given to the personal representative or the trustee for the transfer. For the purpose of this section, consideration does not include the indebtedness balance of any real property that is encumbered by a security lien.
(3) Subsequent transfers. A transfer of property from an heir to a third party is subject to the real estate excise tax. Examples:
(a) Steve inherits real property from his mother's estate. He sells the property to his son for $50,000. The transfer of the property from the estate to Steve is exempt from real estate excise tax. The subsequent sale of the property to his son is a taxable event, and tax is due based upon the full sales price of $50,000.
(b) Susan inherits real property from her father's estate. She decides to sell it to a friend on a real estate contract for $100,000. Tax is due on the $100,000.
(c) Sheri and her two sisters inherit their father's home, valued at $180,000, in equal portions. Sheri wants sole ownership of the home but there are not "in-kind" assets of sufficient value to be distributed by the personal representative to her two sisters in a nonpro rata distribution. In order to take title directly from the personal representative, Sheri pays each of her sisters $60,000, and they quitclaim their right to the property under the will. Tax is due on the total of $120,000 paid for the property.
(4) Community property or right of survivorship. The transfer of real property to a surviving spouse or surviving domestic partner in accordance with a community property agreement or a survivorship clause is not subject to real estate excise tax.
(5) Joint tenants. The transfer of real property upon the death of a joint tenant to the remaining joint tenants under right of survivorship is not subject to the real estate excise tax.
(6) Life estates and remainder interests. The conveyance of a life estate to the grantor with a remainder interest to another party is not a taxable transfer if no consideration passes. For example, Nate and Libby convey their property to their son, Rex, retaining a life estate for themselves. The transaction is not subject to real estate excise tax because Rex pays no consideration. Upon the deaths of Nate and Libby, the title will vest in Rex and no real estate excise tax is due. However, if Nate and Libby convey their property to Rex, retaining a life estate for themselves, and Rex pays any consideration for his future interest, the transaction is taxable. Tax is due on the total consideration paid.
(7) Documentation. In order to claim this exemption, the following documentation must be provided:
(a) Community property agreement. If the property is being transferred under the terms of a community property agreement, copies of the recorded agreement and certified copy of the death certificate;
(b) Trusts. If property is being transferred under the terms of a testamentary trust without probate, a certified copy of the death certificate, and a copy of the trust agreement showing the authority of the grantor;
(c) Probate. In the case of a probated will, a certified copy of the letters testamentary, or in the case of intestate administration, a certified copy of the letters of administration, showing that the grantor is the court appointed executor/executrix or administrator;
(d) Joint tenants and remainder interests. A certified copy of the death certificate is recorded to perfect title;
(e) Court order. If the property is being transferred pursuant to a court order, a certified copy of the court order requiring the transfer of property, and confirming that the grantor is required to do so under the terms of the order.
(f) Other. If the community property interest of the decedent is being transferred to a surviving spouse or surviving domestic partner absent the documentation set forth in (a) through (e) of this subsection, a certified copy of the death certificate and a signed affidavit from the surviving spouse or surviving domestic partner affirming that he or she is the sole and rightful heir of the property.
[Statutory Authority: RCW 82.45.150. 08-24-095, § 458-61A-202, filed 12/2/08, effective 1/2/09. Statutory Authority: RCW 82.32.300, 82.01.060(2), and 82.45.150. 05-23-093, § 458-61A-202, filed 11/16/05, effective 12/17/05.]