What’s Happening?
On October 24, 2024, the Washington Supreme Court affirmed a narrow interpretation of investment income in Antio, LLC v. Department of Revenue.[1] This ruling significantly restricts the ability for a business to deduct investment income for Business & Occupation (B&O) tax purposes.
Background
Under the applicable statute (RCW 82.04.4281), “[a]mounts derived from investments” may be deducted unless they are “amounts received from loans” or “amounts received by a banking, lending, or security business.” Until Antio, the deduction had been interpreted to apply broadly by both the Department of Revenue and the taxpayer community.
Antio involved 16 related LLCs that applied for a B&O tax refund in 2019. As investment companies that buy and sell distressed debt instruments, the LLCs claimed that 100% of their revenue was deductible under RCW 82.04.4281. However, the Supreme Court concluded that the taxpayers “may not deduct income generated by their main business activities under RCW 82.04.4281” because “businesses can claim only the deduction for investments that are incidental to the main purpose of a business.” This narrow description of “investment” is based on a series of prior judicial interpretations. In particular, Antio upheld O’Leary’s[2] definition of “investment” as the “incidental investment of surplus funds.”
Impact and Next Steps
Any business that earns more than incidental amounts (interpreted at 5%) of investment income is at risk. Businesses that earn investment income and are either not registered or have been deducting investment income from their taxable receipts under the statute should review their reporting methods. Further, unregistered businesses are at risk for not only the unpaid taxes, but also penalties up to 39% as well interest for the prior seven years. Unless the Court approves a reconsideration petition, legislation may be required to fix this mess. Risk mitigation strategies should be considered to reduce risk.
Contact
For more information or assistance, please contact Mike Roben, John Katsandres, or Caleb Allen at KOM Consulting. Our team can help you better understand the impact of this case on your business operations and tax reporting obligations.
[1] Antio LLC v. Department of Revenue, Wash., No. 102223-9
[2] O’Leary v. Department of Revenue, Wash. S. Ct. 717 P2d 273 (1986)