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Retroactive taxes may scare off California entrepreneurs

The California Franchise Tax Board recently made a decision to retroactively collect taxes that the state's business owners and investors had been told they would not be expected to pay. It started 20 years ago when the state offered a capital gains tax incentive to motivate entrepreneurs and investors to set up in California.

Under the incentive, the sale of stock in a qualified business was taxed at half the regular rate for capital gains or rolled into a new qualifying business. However, the Franchise Tax Board now says the taxpayers who benefited will be held responsible for 50 percent of the taxes they legally excluded, plus interest.

This has caused both confusion and outrage among the state's business community and start-ups who feel it is unfair to be penalized for following the rules. Indeed, these investors and entrepreneurs did as they were told, acting completely legally, but are now on the hook for back taxes and targets of potential IRS action.

Some have threatened to take their businesses - and the accompanying revenue and economic stimulation - to a different state in light of California's enthusiastic tax policies.

If you have concerns about how this decision could affect your 2013 filing or your financial situation it may be wise to speak with someone who understands the state and federal tax code, as well as your rights as a taxpayer. Consider meeting with an experienced financial advisor or tax law attorney who can help you review your situation and pursue the best possible outcome for you and your money.

Source: Health Care News, "California Tax Board Imposes Retroactive Taxes on Capital Gains," Steve Stanek, March 5, 2013

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