California Repeals Retroactive Tax on Prior Qualified Small Business Stock Gains

Last month a new law was signed repealing a $120 million retroactive income tax increase on taxpayers that had excluded 50% of the gain from the sale of qualified small business stock.  The increase originated when the FTB lost a case against Cutler who argued that California’s gain exclusion law was unconstitutional because it required California companies to be doing 80% of its business within the state for their stock to qualify for this tax benefit.  The courts determined that this discriminated against out-of-state companies.  The FTB took the position then that no one qualified for the exclusion and starting sending out tax balance due notifications disallowing the gain exclusion for all open years.

California’s politicians saw the light and voted to overturn the retroactive tax increase. When Governor Brown signed this into law he said it “underscores our commitment to strengthening the state’s business climate.”

We expect that the Franchise Tax Board will be contacting those taxpayers who originally received notices to remove the tax assessments from their accounts.  If you have any questions regarding this, please contact our office.