A surprising and potentially very damaging decision by the California Franchise Tax Board (FTB) may challenge that California is still a great place for pioneering entrepreneurs.  Late last month the FTB, reacting to an unfavorable ruling by the Second District Court of Appeal, eliminated one of the few tax policy tools California has to incentivize investment in the state’s start-up companies.

The Qualified Small Business (QSB) exclusion allowed for a 50% tax reduction on the sale of stocks in a small business with under $50 million in assets and at least 80% of its payroll based in California.  The QSB exclusion incentivized people to grow their small businesses in California, adding jobs to our economy, especially in our vital high-tech sector, with the knowledge that they would enjoy a lower tax burden if they were to sell their stake in the company in the future. Not only has the incentive now been eliminated, but the Franchise Tax Board is enforcing its decision retroactively.  The Board is requiring full repayment of the benefits, plus interest, that start-up founders and early investors received dating back to 2008 – some $120 million, in all.

The Bay Area Council has acted quickly to bring the FTB’s decision to the attention of the Administration and the Legislature. Assemblyman Bob Wieckowski from East Bay tech hot spot Fremont is preparing to introduce a bill calling for a legislative fix to the FTB’s decision. We look forward to working with him and other members of the Legislature to prevent the state’s small business community from being negatively impacted by this decision and to keep California a place where innovative entrepreneurs and start-ups can thrive. A recent study – Technology Works — by the Bay Area Council Economic Institute that we shared with Gov. Brown highlights the powerful role of start-ups in creating jobs across all industry sectors.

To engage with the Bay Area Council in supporting a legislative fix to the FTB’s action on the qualified small business capital gains tax exclusion, contact Emily Finkel.

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