Alert
Washington’s New Guidance Is a Positive Update for Collective Investment Vehicles
The Washington Department of Revenue has issued interim guidance regarding the treatment of collective investment vehicles (CIV) for business and occupation (B&O) tax purposes.
This guidance is particularly relevant for taxpayers engaged in investment activities in Washington, as it clarifies the tax implications of their investment structures. The Department of Revenue plans to issue final guidance by June 30, 2026.
What Is an Investment Vehicle?
An investment vehicle generally is a financial structure that allows individuals or entities to pool their resources to invest in various assets, such as stocks, bonds, real estate, or other securities. These vehicles can take multiple forms, including mutual funds, collective funds, partnerships, limited liability companies, corporations, and trusts.
The primary purpose of an investment vehicle is to provide investors with a way to diversify their investments, manage risk, and achieve specific financial goals while benefiting from professional management and expertise.
Background on New Guidance
Until recently, many nonfinancial companies, including investment funds, relied on the B&O tax deduction under RCW 82.04.4281(1)(a) to deduct their investment income. However, now many cannot and the entirety of their income is subject to Washington B&O tax. The change is the result from the recent Washington Supreme Court Case Antio, LLC v. Washington State Department of Revenue.
Under Antio, the Washington Supreme Court found that investment income must be incidental to the main purpose of a business to be deductible. Therefore, businesses generally could no longer use RCW 82.04.4281(1)(a) to deduct their exempted investment income for B&O tax purposes unless the income is merely incidental to the business’s main activity.
According to the interim guidance, the investment income generated by CIVs will be treated as nontaxable under the B&O tax, provided that the CIV meets specific criteria.
This means that taxpayers using CIVs to manage their investments in Washington can potentially benefit from a tax-efficient structure, allowing them to retain more of their investment income.
Criteria for Exempt CIVs
To qualify as a CIV, the entity must:
- Derive at least 90% of its total gross income from investments
- Hold passive investment assets for the benefit of investors
- Have investment decisions made by a manager or advisor
This structure allows taxpayers to benefit from professional management while enjoying favorable tax treatment. While investment income is exempt from B&O tax, any amounts received by a CIV from non-investment sources will still be taxable.
An advisor can help taxpayers understand this distinction for the tax implications of income sources and plan accordingly.
Next Steps with CIVs and Washington’s Guidance
Amounts received by investors in a CIV are generally taxable unless specific deductions or exemptions apply.
The Department of Revenue will continue to review the treatment of CIVs before issuing final guidance by June 30, 2026. Stay informed about any changes that may affect your investment strategies and tax obligations.
We’re Here to Help
If you have inquiries about the interim guidance or how it may affect yourself or your business, please contact your Moss Adams professional.