Governor Brown Reinstates Tax Break for Small Business Owners


It took a relatively short amount of time for the California legislature and Governor Brown to take action.

Last year, the California Court of Appeals ruled that a tax break, known as the Qualified Small Business Stock (QSBS) exemption, was partially unconstitutional. This gave the Franchise Tax Board the authority to collect retroactive taxes assessed on small business owners that took the QSBS exemption between 2008 and 2012. Basically, business owners were being penalized for complying with the law.

On Friday, October 4, Governor Brown signed AB1412, and essentially reinstated a tax break for small business owners on capital gains from the sale of stocks for the years 2008 through 2012. With this one signature, 2,500 taxpayers were relieved from paying $120 million in back taxes.

In the new law, the “substantially all” California property and payroll requirement for the holding period of the QSBS is eliminated. This is an important stipulation. Taxpayers can only file claims for refunds in 2008 or 2009 if they thought they were ineligible due to the “substantially all” requirement. And, these claims must be filed within 180 days from October 4, 2013.

In addition, a few new elements of the law are that 50% of the sale of the stock is excluded though 12/31/2012 and on the date the stock was acquired, at least 80% of the corporation’s payroll was in California.

On October 7, 2013, the Franchise Tax Board developed guidelines for taxpayers on next steps, including filing their 2012 tax return, taking the QSBS election if they did not do this originally, and responding to notices of unpaid tax, interest, or penalties assessed.

So, how did this change happen so fast? It was a collective effort of small business owners calling and writing their representative, a few legislators writing up the bill, and California Society of CPAs’ members sending letters to Governor Brown urging him to sign the bill.

BPM was part of this effort. Our tax partners and managers rallied in a few short days to speak up for our clients.