Corporate Tax Rates
Federal Corporate Tax: C corporations are taxed federally at a flat 21% on taxable income.
Washington State: Washington has no state corporate income tax. Instead, it imposes a Business & Occupation (B&O) tax on gross receipts. For most tech startups (service activities), the rate is around 1.5%. A Small Business B&O Tax Credit often eliminates this tax for early-stage startups with low revenue.
Key Tax Deductions
R&D Expenses: As of 2025, domestic R&D costs can be fully deducted in the year they are incurred, a significant benefit for tech startups. For prior years (2022-2024), these costs had to be amortized over 5 years.
Startup and Organizational Costs: You can immediately deduct up to $5,000 in startup costs and $5,000 in organizational costs. Any amount above this is amortized over 15 years.
Operating Expenses: All ordinary and necessary business expenses like salaries, rent, marketing, and software subscriptions are fully deductible.
Equipment: The cost of equipment like computers and servers can typically be written off immediately using §179 expensing or bonus depreciation.
Tax Credits for Tech Startups
Federal R&D Tax Credit: This is a powerful tool for startups. If you have little or no income tax liability, you can use up to $500,000 per year of the R&D credit to offset your employer payroll taxes (Social Security and Medicare). This provides a direct cash-flow benefit.
Small Business Health Care Tax Credit: If you have fewer than 25 employees and offer health insurance, you may be eligible for a credit to offset up to 50% of the premiums the company pays.
Washington State Credits: Washington's primary incentive is the Small Business B&O Tax Credit. The state does not currently have a general R&D tax credit, but may have targeted incentives for businesses in rural counties or specific industries.
Filing and Payment Obligations
Federal (Form 1120): Your corporate income tax return is due by April 15 for a calendar-year corporation. If you expect to owe $500 or more in tax, you must make quarterly estimated tax payments.
Washington (Excise Tax Return): You must file B&O tax returns online, typically quarterly or annually. The annual due date is April 15. Even if you owe no tax due to the small business credit, you must still file a return.
Treatment of Net Operating Losses (NOLs)
When your deductions exceed your income, you create a Net Operating Loss (NOL). These NOLs can be carried forward indefinitely to offset future profits. However, they can only offset up to 80% of taxable income in a given future year. Washington's B&O tax is based on gross revenue, so there is no concept of an NOL at the state level.
Tax Considerations in a Company Sale or Exit
Stock Sale vs. Asset Sale: An asset sale can lead to "double taxation" (tax at the corporate level, then again at the shareholder level). A stock sale is generally preferred, as it's taxed only once at the shareholder level.
Qualified Small Business Stock (QSBS): This is a major C-Corp advantage. If you hold your stock for over 5 years, you may be able to exclude up to 100% of your capital gains from federal tax, capped at $10 million or 10x your basis. Washington also recognizes the federal QSBS exclusion, making the gain exempt from the state's 7% capital gains tax as well.