Back in December, I reported on how the Franchise Tax Board (California’s income tax agency) would interpret the Cutter decision. I didn’t spend much time on it, as the subject of Qualified Small Business stock (QSB) doesn’t impact many of my blog readers. The FTB decided that since the appellate court ruled as aspect of California’s law on sale of QSB stock unconstitutional, one way around the issue was to void the law in its entirety. And send individuals who took the QSB deduction penalty and interest notices. Surprise!
That said, an entrepreneur named Brian Overstreet has written a column that is about as nasty as can be toward the FTB and California. (I recommend reading the entire column.) As Mr. Overstreet notes the impact:
1. If you are a business founder or early investor who sold stock since 2008 and took the QSB exclusion: Surprise! You are going to get a bill from the FTB for the 50 percent of the taxes you excluded plus interest plus possible penalties.
2. If you are a business founder or early investor and have not yet sold stock: Rethink your business and tax planning strategies. Consider whether it’s fiscally prudent to stay in California.
3. If you a contemplating starting or investing in a California business: Think long and hard. Consider out-of-state alternatives.
Of course, there’s definitely a constitutional issue here, too. Given that some of the impacted entrepreneurs have deep pockets, I expect this ruling to head to court. I suspect the FTB can do this for the current tax year (2012; the ruling was announced in December) but I doubt it will hold up for prior tax years.
The other issue is one any entrepreneur in California should consider. As Mr. Overstreet noted, “Why in the world would any smart business person start or invest in a new California company facing that kind of penalty?”