The Law Office of Lynnette Ariathurai A Professional Corporation

End of California tax incentive affects business startup funds

Investment capital is usually one of the most important ingredients for creating a successful startup business. Until recently, California tax law was designed to encourage investment into new business startup companies by giving investors a special tax break for infusing capital into small businesses that were just starting up. However, the state has recently decided to end this tax incentive, which is expected to significantly reduce investments in startups, forcing new businesses to take this into consideration in their business planning endeavors.

Experts are predicting that ending the tax incentive, known as the Qualified Small Business Stock, may decrease investment capital in new startup businesses from anywhere between $85 million to $127 million each year. The decision to end the incentive was made by the state's tax board at the end of 2012. Additionally, those who had benefited from the tax incentive will be taxed retroactively for a total of approximately $128 million.

Investors have already begun to create political groups to advocate against the proposed retroactive tax. One prominent advocacy group, known as Engine Advocacy, cites data from a 2011 study, which predicted a negative impact on the economy once the state decided to end the business startup tax incentive. However, entrepreneurs will be more financially hurt than the investors, since funding capital is a vital part of most beginning new businesses.

On the other hand, not all hope is lost. With the proper business planning, an entrepreneur in California will still be able to create a successful business startup. However, this will require a more in-depth study of what the new law actually means for future investors. A businessperson with an effective plan of action will still have a good chance of succeeding.

Source: Silicon Valley Business Journal, "End of CA tax incentive could cost startups $127 million annually, report," Lauren Hepler, April 9, 2013

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