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Governor Brown Signs Law Allowing Retroactive
Tax Break For California Entrepreneurs

By Tiffany L. Rider - Staff Writer

October 8, 2013 – Entrepreneurs expecting to pay back taxes due to a ruling last year invalidating California’s Qualified Small Business Stock (QSBS) tax benefit law, are now off the hook, thanks to a new law signed by Gov. Jerry Brown on October 4.

The governor’s authorization of Assembly Bill 1412 (D-Bocanegra) and its corresponding Senate Bill 209 (D-Lieu) preserves a retroactive tax break for job-creating entrepreneurs who took a chance with their own capital and found success in difficult business environments.

According to Democratic Sen. Ted Lieu, a joint author of the new law, the action will benefit thousands of taxpayers impacted by a court decision last year in the case, Cutler v. Franchise Tax Board. The ruling found the QSBS tax credit law, passed in 1993, to be partially unconstitutional under the U.S. Constitution’s Commerce Clause. QSBS is an incentive that allows entrepreneurs with at least 80 percent of business assets and staff in California to exclude 50 percent of capital gains earned from investments of under $50 million.

Without the governor’s authorization of the new law, the finding that QSBS is unconstitutional would have meant going back and taxing those entrepreneurs, starting with investments made in 2008, potentially recouping $120 million.

“This issue garnered national attention and any other resolution would have further blackened the business reputation of California,” according to Blake Christian, certified public accountant and partner with Holthouse Carlin & Van Trigt. “California does not offer lower capital gains rates on long-term assets, so the QSBS benefit is all the more important to lower the tax bite on the occasionally successful entrepreneur. This provides more after-tax cash for the entrepreneur to invest in future businesses.”

Though the law only temporarily reinstates income exclusion under QSBS for taxable years after 2008 or before 2013, Lieu said the importance of this bill becoming law is that it “reinforces the principle that California stands behind the rule of law.

“It’s simply unfair to punish people for following the law even if it was later overruled,” Lieu said in a statement. “I applaud Governor Brown for fully and completely ending this job-killing, retroactive tax.”

Some of the business interests supportive of the new law include the California Business Defense, the California Chamber of Commerce, the California Healthcare Institute, the Bay Area Council, TechAmerica, the Orange County Tech Alliance and the California Business Roundtable.

“On behalf of the members of the California Business Roundtable I want to commend the governor for the signing of AB 1412,” Rob Lapsley, president of the California Business Roundtable, said in a statement. “The governor has sent a clear and positive message to the rest of the country that he stands for fairness for small investors and supports their role in building a stronger economy for California.”