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Retroactive tax bill in California may push more startups to Texas

A recent lawsuit ended in California sending capital gains tax bills to companies dating back five years, even though companies had counted on the tax break in order to do business in the state.

tax bill silicon

tax bill

Texas is looking good to California startups

There are so many elements that can affect a business’s capability to make money. Any form of incoming revenue has to be accounted for, scrutinized and likely taxed before the profits make their way into the pockets of the owners and staff. Some states have an easier time with this than others, especially if residents and businesses don’t have to pay state taxes.

After a recent announcement that California small business owners can expect to be hit with a retroactive tax bill spanning the last 5 years, startups may look to states like Texas set their stake in the ground.

One of the incentives to do business in California now gone

One of the big incentives for California business owners to operate their companies there was a partial state tax exclusion on sales of stock of a Qualified Small Business (QSB). The exclusion allowed business owners and investors in these businesses to exclude 50 percent of any capital gains acquired through the sale of stock.

Even with increased taxes in the state of California in recent years, the impact wasn’t quite as damaging since owners could exclude half of the costs of capital gains. But due to a lawsuit filed against the Franchise Tax Board by a company that did not meet the requirements necessary to claim the exclusion, the California Court of Appeals retracted the exclusion for all business owners on sales of stock dating back to 2008.

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These businesses will essentially be presented with a bill for the remaining 50 percent of those capital gains as well as interest.

Businesses get tax bill for five years worth of retroactive taxes

Business owners are already taking long, hard looks at their budgets and working to re-balance expenses after the recent fiscal cliff negotiations; however, the government decided to require no federal capital gains tax if shares were sold between September of 2010 and January of this year, making the decision in California sting even more.

To retroactively require business’s to pay a 5-year backlog of taxes they assumed would be excluded is unimaginable. This decision may serve as motivation for California business owners, and those in similar situations to consider relocating to a more economically friendly state. And the tax bill announcement will definitely be on the minds of entrepreneurs looking to begin a startup in Silicon Valley.

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Destiny Bennett is a journalist who has earned double communications' degrees in Journalism and Public Relations, as well as a certification in Business from The University of Texas at Austin. She has written stories for AustinWoman Magazine as well as various University of Texas publications and enjoys the art of telling a story. Her interests include finance, technology, social media...and watching HGTV religiously.

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