California entrepreneurs were likely very surprised recently when they found out they were liable for paying four years’ worth of taxes to the state that they were previously not required to pay. Last December, the Franchise Tax Board eliminated a capital gains tax break that had been in place for 20 years and sent out notices to business owners just before Christmas that they were liable for back taxes, plus interest, to 2008. This affects roughly 2,500 entrepreneurs and investors in our state.

This means that those affected have an increase in state and sales taxes, and they are now currently liable for the capital gains taxes that they were exempt from paying in the past. The Franchise Tax Board claims that the average business owner will owe $60,000 in back taxes. However, several entrepreneurs are disputing this, claiming that their tax bills range from $80,000 to $500,000, not counting possible penalties or interest.

The tax break law was enacted in 1999 and was helping to spur business growth and employment in California. Last year, however, a California Court of Appeal deemed parts of the law unconstitutional. As a result, the tax board invalidated it retroactively to 2008.

Many believe that the removal of this tax break will have disastrous consequences for California and for businesses, and some politicians have stated that they will try to reverse or fix the decision. For now, many entrepreneurs in our state are looking at hefty tax hits that they feel are unfair. Anyone in our state who faces payment of these back taxes may wish to examine what options are available to them.

Source: San Francisco Chronicle, “Entrepreneurs face back tax bills to ’08,” Andrew S. Ross, Feb. 4, 2013