Lawmakers & Small business Owners Call for Action on State's Retroactive Tax
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Published on Apr 30, 2013
Senate Bill 209, authored jointly by Sen. Lieu and Assm. Gorell, would bring relief to thousands of taxpayers who were recently notified that the FTB would retroactively assess those who claimed California's QSBS tax benefits. In addition, Assembly Bill 1203 was also jointly authored by Lieu and Gorell to establish a prohibition against state agencies from seeking penalties and interest when applying retroactive tax increases as a result of a court ruling like that in this case.
The issue stems from a decision by the California Court of Appeal, in the Cutler v. Franchise Tax Board case, wherein the Court ruled that the California QSBS deferral and exclusion was unconstitutional and the Franchise Tax Board administratively implemented the Court's decision. The QSBS tax credit law, passed in 1993, was intended to spur investment in California startups and small businesses. The incentive allowed for the exclusion of 50 percent of capital gains earned from investments in businesses valued less than $50 million that have at least 80 percent of their staff and assets in California.
Faced with a court ruling that found several aspects of the tax provisions to be in violation of the U.S. Constitution's Commerce Clause, the Tax Board asserted that their only option was to enforce the Court of Appeal's decision, ending the 20-year-old capital gains tax break. This resulted in the retroactive taxation of thousands of investors going back to 2008.
As a result, entrepreneurs throughout the state are now facing exceptionally large tax bills -- as high as tens of thousands to hundreds of thousands each. It is estimated that the FTB is looking to recoup as much as $120 million in retroactive taxes.
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