California To Hit Startup Founders with Big Retroactive Tax Bills
California is a great place to live and work, but it is not a particularly friendly place to start and run a small business.HT: peHUB
In 1999, I co-founded Sagient Research Systems, an enterprise-focused data company in San Diego. Over the ensuing 13 years we tinkered, triumphed, failed, and even tempted bankruptcy. But through it all, we worked hard, we worked fairly, and we grew. Slowly, we evolved into a successful business employing nearly 40 people, all in California. In mid-2012, we sold Sagient Research in a transaction that was a good exit for everyone involved.
One of the very few benefits entrepreneurs and early-stage investors can look forward to in California is the partial state income tax exclusion on sales of stock of a Qualified Small Business (“QSB”). This exclusion incentivizes people to start businesses in California and to keep them here. As the law was written, founders and early investors in QSBs can exclude 50 percent of the taxable gain on the sale of their stock—meaning that they pay only half the regular California tax rate on the gain (about 4.5 percent instead of 9 percent).
While the QSB exclusion did not play a role in our decision to start Sagient Research, it justified our decision to stay in California. Although California taxes stock sales at nearly 10 percent (now nearly 13 percent due to Prop 30), we knew as a qualifying QSB, we’d only pay half that amount. Without the QSB provision, we might have decamped to a more tax- and business-friendly state.
After we completed the sale, I paid both my federal and state estimated taxes computed with the QSB exclusion. I thought I was clear until April 2013.
Then in late December, the FTB decided to cancel the QSB tax benefits and RETROACTIVELY deny the benefits for the past five years.
How is that even possible?...MORE
