About Face! California Passes Retroactive Small Business Stock Tax Break

 

SAN FRANCISCO, CA - DECEMBER 15: California Gov. Jerry Brown speaks during The Governor's Conference on Extreme Climate Risks and California's Future on December 15, 2011 in San Francisco, California. California Gov. Jerry Brown hosted a one day conference on climate change and how it may affect California. (Image credit: Getty Images via @daylife)

California's Gov. Jerry Brown is known for raising taxes not cutting them. He championed sweeping retroactive tax hikes in November 2012, sending rates for $1 million-plus-earners to 13.3%, up from 10.3%. And he's generally not viewed as a friend to business either.

Yet Brown signed into law a widely watched bill retroactively allowing Qualified Small Business Stock exclusions and deferrals for 2008-2012. Yes, that's a tax cut and one favoring business and investors with money. Broadly stated, Qualified Small Business Stock (QSBS) is issued by a C corporation with no more than $50 million of assets and at least 80% of its assets used in an active business (excluding personal services, finance, farming, restaurants, hotels, etc). See Tax-Free In 2011: Qualified Small Business Stock. 

California's version of the tax break allowed the exclusion of 50 percent of capital gains earned from investments under $50 million. But California's version also required virtually everything to be in California. In Frank Cutler v. Franchise Tax Board, (2012) 208 Cal.App.4th 1247, the California Supreme Court held that was unconstitutional.

But that didn't stop California's notoriously obstreperous tax collectors who pushed assessments anyway saying that even those who did clearly qualify for the break would be taxed. In response to Cutler, California's FTB announced in FTB Notice No. 2012-03 (December 21, 2012) that the QSBS statute was invalid in its entirety. Many were facing crippling tax liabilities.

Fortunately, AB 1412 breaks with California's fiercely fought tax rules. Now there is no requirement for the company to have 80 percent of its assets and payroll in California while the taxpayer held the stock. What's more, California taxpayers who have not yet filed their 2012 return can claim the QSBS exclusion or deferral. For taxpayers who filed their 2008 – 2012 tax returns and were contacted by California's Franchise Tax Board regarding their QSBS election, the FTB will notify them that: