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California Governor Jerry Brown Hands a Victory to Startups and Their Investors

Last week, in a victory for startups and their investors, California Governor Jerry Brown signed into law Assembly Bill No. 1412. The new law temporarily quashes a move by the state’s tax board to levy up to $120 million in back taxes and penalties on entrepreneurs and small business owners.

History

In 2008, the California legislature passed a tax exemption that allowed small-business investors in the state to exclude from their taxable income, 50 percent of their gains from the sale of qualified small-business stock. The exemption was known as the Qualified Small Business Stock exemption. Last year, the California Court of Appeals ruled that the exemption was partially unconstitutional because it “[favored] domestic corporations” and thus was facially discriminatory, in violation of the U.S. Commerce Clause. The appeal’s court ruling gave California’s Franchise Tax Board the authority to collect retroactive taxes assessed on small business owners that took the exemption in tax years 2008-2012. Some estimate that the total amount levied would have been around $120 million. Knowing that investors would be upset about the retroactive tax, California Business Defense organized a coalition of entrepreneurs, attorneys, and lawmakers, in an effort to reverse the Board’s decision to reinstate the tax.

The California Legislature and Governor Brown Respond

In early September, the California legislature, unsure of how to proceed, approved two conflicting bills. Senate Bill No. 209 offered some relief to taxpayers by leaving the Board’s ruling in effect, but reducing the exemption level from 50 percent to 38 percent. Assembly Bill No. 1412 offered complete relief, by restoring the 50 percent exemption for tax years 1997 through 2016. The law expires in 2016 and would need to be reauthorized in order to remain part of the state tax code. Last Friday, in a victory for entrepreneurs, small businesses, startups, and investors, Governor Brown — who had remained silent on the issue for the past year — chose to sign Assembly Bill No. 1412. The founder of California Business Defense applauded the Governor’s decision and thanked him for “reassuring the state’s innovators and risk-takers that California is still the place where the companies of tomorrow should be built.”

Potential Costs

If the Governor had not chosen to provide complete relief, the economic consequences would have been severe. Engine, the voice of startups in government, estimated that the tax increase would have resulted in a two percent decline in early-stage investments in startups each year in California, meaning a drop of $85 to $127 million in capital for young businesses and startups with the highest growth potential.

We Can Help

If you are an entrepreneur looking to start a business or if you are a startup, there are many issues that may affect you and your company. From tax requirements to maintaining your financial well-being and success, the issues can be overwhelming. For help understanding possible legal matters that may face startups and any other issue affecting startups in Sacramento and throughout the area, please contact us today.