California Small Business Stock Legislation

Oct. 3, 2013

Beginning in 1993, California provided a 50 percent exclusion from income for gains on the sale of certain small business stock. The exclusion was similar to the federal exclusion, but the California exclusion required the corporation to maintain 80 percent of its assets and payroll in the state. In 2012, the California Court of Appeals’ decision in Cutler v. Franchise Tax Board held that the statute was unconstitutional as it did not allow for the exclusion of gain from stock of companies that did not meet the 80 percent property and payroll tests. The California Franchise Tax Board recently began issuing assessment notices to taxpayers who claimed the exclusions.

Two bills that would partially reinstate the California exclusion have been passed by the legislature and are awaiting California Gov. Jerry Brown’s signature. Senate Bill (SB) 209 would provide a 38 percent exclusion from income for qualified small business stock, while Assembly Bill (AB) 1412 would provide a 50 percent exclusion from income for qualified small business stock. The bills also would waive interest and penalties for any assessments against taxpayers for selling stock that upon audit is found to not qualify as California small business stock.

Gov. Brown will need to sign one of the two bills. Both bills apply retroactively to sales of small business stock made on or after Jan. 1, 2008, and before Jan. 1, 2012. If SB 209 ultimately is enacted, California taxpayers who claimed the previous 50 percent exclusion will have an outstanding tax bill as the exclusion only would be for 38 percent of the gain.

For More Information
Tim Hayes
  LinkedIn Profile

Jess Penilla
  LinkedIn Profile

Mike Hollowell
  LinkedIn Profile

Contact Us