Tax Break Reversal: California Bills Small Business Owners, Investors

california capitol

Owners and investors of small businesses in California are ruing a federal court decision that sticks them with more than $120 million in bills for back taxes.

Now, according to several reports, state lawmakers are being urged to reverse a court decision that eliminated the Qualified Small Business Stock tax break. The tax break allowed a small business owner or an investor in small businesses based mostly in California to exclude 50 percent of their income from state tax filings.

An editorial from The (Riverside, Calif.) Press-Enterprise notes that this tax break had been in place for 20 years in California and had been seen as a way for the state to promote small business growth and investments in these businesses. In December 2012 however, a federal court ruled that California’s tax break law violated interstate commerce laws and struck it down.

California went a step further and is now trying to recoup much of the money it believes it lost to the tax break, to the tune of at least $120 million. The Franchise Tax Board ruled that breaks given dating back to 2008 need to be reclaimed by the state, and it has billed more than 2,000 taxpayers for these back taxes. The average bill is between $60,000 and $100,000, according to The Press-Enterprise.

A report from UTSanDiego notes an instance in which one former investor in small business in California is now stuck with a bill higher than $250,000. That report also notes three separate pieces of pending legislation in California’s Senate and Assembly that would reverse the 2012 court decision, re-instate the tax break and expand it to include both in-state and out-of-state investments.

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Joshua Sophy - Staff Writer

Joshua Sophy Joshua Sophy is a staff writer for Small Business Trends, covering technology and business news. He is a journalist and editor with 15 years experience in media. A former newspaper reporter and editor, Joshua also serves as President of the Board of Directors of a curling club and is editor of a regional newsletter focused on the sport of curling in the Eastern U.S.

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