I received the following question from a CPA friend the other day:
“I have a client that recently formed a Washington social purpose corporation. Do you have a sense of how SPCs are characterized for federal income tax purposes?”
For tax purposes, Washington social purpose corporations are just a type of Washington for profit corporation, formed under the Washington Business Corporation Act, RCW 23B. There is no difference in federal or state tax treatment between an SPC and a regular for-profit corporation.
Accordingly, for federal tax purposes, SPCs are generally treated as ordinary C corporations, which are subject to corporate income tax. If they have only one class of stock and fewer than 100 shareholders, and otherwise qualify, they may elect to be classified as S corporations, which pass gross income, deductions, and losses through to shareholders.
SPCs, like other corporations, can’t be classified as partnerships. Similarly, because SPCs may distribute earnings to shareholders and use assets for shareholders’ benefit, they can’t generally qualify for tax-exempt status (such as Section 501(c)(3) or 501(c)(4) status).
For Washington State tax purposes, SPCs are taxed just like any other type of business entity. They are subject to the business and occupation tax, regardless of whether they are considered C corporations or S corporations for federal tax purposes; Washington does not recognize pass-through companies. They are also liable for sales tax on both sales and purchases, as well as property taxes, in the same manner as other Washington businesses.