Selling A Business Taxed Retroactively In California

On behalf of The Law Office of Lynnette Ariathurai, A Professional Corporation posted in Sales & Dissolutions on Thursday, February 21, 2013.

Many are claiming that the California tax authorities are being unfair by their recent decision to retroactively charge business owners to 2008 for transactions in which they legally obtained tax breaks. A small business owner who had previously benefited legally from tax breaks from selling a business has more than likely been contacted by the tax authorities demanding payment for back taxes. It remains to be seen what kind of repercussions this will have on businesses in our state.

Approximately 2,000 entrepreneurs, investors and business owners have been contacted by the state tax authorities in their attempt to obtain $120 million of back taxes for sales of stakes in small businesses. The authorities are attempting to obtain payment for four years' worth of back taxes. Investors and business owners received notices regarding the back taxes in late December.

The notice explained that the courts had found the qualified small-business capital gains tax incentive to be unconstitutional. Under the previous law, the business owners qualified for the tax break by keeping at least 80 percent of their businesses in-state. For many entrepreneurs, this was the main reason why they decided to stay in California rather than move to another state with lower business costs and expenses.

These are just some of the tax issues which one may face when selling a business in California. It is important for business owners and investors to stay informed regarding the latest changes to tax law that could affect small businesses. Therefore, a business plan should be updated regularly in order to make sure changes in tax law are accounted for in a business's overall strategy.

Source: Bloomberg Businessweek, "California Seeks $120 Million in Back Taxes from Small Businesses," John Tozzi, Feb. 6, 2013

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