According to a California law that was enacted five years ago, people who wanted to invest in small businesses in our state could get a tax break. With that incentive, many people chose to invest their money in promising companies across our state. The benefits of this law are clear. Small-businesses can increase their chances of succeeding in a competitive state, and investors are rewarded through tax breaks for supporting them. Unfortunately, the state is now telling these investors to pay up.
In December, a court ruled that the tax break was unconstitutional, and the Franchise Tax Board has jumped on that. Anyone who benefited from the tax breaks has been ordered to pay retroactive taxes. In total, small-business investors will have to pay back $120 million for tax breaks they already received.
If the Franchise Tax Board gets its way, as many as 2,000 small-business investors could be affected, with some having to pay as much as $250,000. Although one state senator is trying to protect these individuals, arguing that they should not be penalized for following the law, it is unclear whether his efforts will be successful.
Unfortunately, many investors in California may now be facing a bill they cannot afford to pay. When facing tax controversies like this, however, it may be helpful to work with an attorney who has a good understanding of local tax laws. No one should be punished for following the rules, and situations like this are not always as clear-cut as they may initially seem.
Source: CBS Sacramento, "California Wants Small-Business Owners To Pay Back $120 Million In Tax Breaks," Aug. 19, 2013