Posted tagged ‘Business Tax’

‘California’s Split Personality’ – Coastal Economy Brisk While Large Swath of the State Suffers

February 3, 2016

California FlagPleased to note that the City Journal published a column which relies in part on our firm’s research about companies shifting their investments out of California to more business-friendly states and nations. The column’s subtitle is quite apt: “The Golden State’s tech sector is booming, even as its industrial base flees.” It’s written by Steven Malanga, the senior editor of the magazine and a senior fellow at the Manhattan Institute.

See California’s Split PersonalityCity Journal, a quarterly magazine of urban affairs, published by the Manhattan Institute, is “the most beautifully produced political magazine in the country,” according to PowerLine.

One focus of this blog has been to address California’s perennially difficult business environment. Joseph Vranich is known as The Business Relocation Coach while the formal name of his business is Spectrum Location Solutions. Joe helps companies find great locations in which to grow. Also, Joe has been a Keynote Speaker for more than 20 years – see A Speaker Throughout the U.S. and in Europe and Asia.

 

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California: The Land of Double Taxation for Small Businesses

November 26, 2014

Just think: You run a small company. Your partner embezzles from you and you are reeling – you feel like you’ve been punched in the gut. Next, California’s state government shows up and slaps you around. When you object, Sacramento offers no apology, no comfort. You’re on your own.

Farfetched? Read on to see what happened to a California Limited Liability Company (LLC) that tried to play by what it thought were common-sense rules.

First, an LLC is a form of business that permits the owner to avoid double taxation. In California, such companies must pay an annual minimum franchise tax of $800, which is the highest of any state (in 40 other states the fee is $100 or less) and may be subject to additional fees based on revenue.

An article by Mike Dazé in Bloomberg BNA – Corporate Close-Up: The Burden of California’s Taxes and Fees on Limited Liability Companies – points out that the State Board of Equalization “illustrates the challenges businesses face when trying to reduce their liability for taxes and fees in California. A company filing two short-period returns in tax year 2010 unsuccessfully protested the imposition of the minimum tax and LLC fee in each short period.”

In short, they objected to double taxation.

The company, Bay Area Gun Vault, LLC, converted from a two-member entity into a single-member LLC after one of the two members was caught embezzling money and was removed. So the company filed two returns for 2010, one as a two-member LLC and the second as a single-member LLC.

In the first return, the company timely paid the annual tax of $800 and an extra LLC fee on profit. In the return for the second period, the company did not pay the LLC annual fee, but did pay the tax.

Despite two tax returns, the company clarified that the income was for the same business with the same tax ID number and assets and was operating in the same location. So the company should owe only $800 in tax and an LLC fee of $6,000.

But the removal of the embezzler caused a “technical termination” of the original LLC because 50 percent or more of the interests changed hands. Hence, the resulting single-member LLC was a “new entity for tax purposes” and owed the minimum tax and LLC fee during the same year.

Mr. Dazé wrote, “The logic of the company’s argument is appealing: LLC taxes and fees should not be imposed twice in the same year on the same business.”

The Board claims there is no statutory support for that position.

Well, if the Board is correct, why did legislators let an unfair law stand? Do Sacramento lawmakers use no foresight in determining whether technical provisions in business-oriented laws might cause future injury?

Actually, I know the answers to my own questions. Here is why the legislature doesn’t care how its actions harm the business community:

  • First, the Franchise Tax Board (California’s version of the Internal Revenue Service) has projected revenue from LLC taxes and fees to be $753 million in fiscal year 2014-2015. Sacramento wants to collect every single penny of that revenue.
  • Next, California’s legislature is packed with people who will use taxpayer funds to support the latest half-baked ideas. But they routinely turn a deaf ear to requests from the business community for fair taxation and regulatory policies.
  • Finally, most Sacramento politicians are clueless about what it takes to run a business.

To amplify on that last point – only “18 percent of the Democrats who control both houses of California’s full-time legislature worked in business, farming or medicine before being elected,” wrote former California Assemblyman Chuck DeVore. “The remainder drew paychecks from government, worked as community organizers, or were attorneys.”

In business-friendly Texas, “Democrats are more than twice as likely as their California counterparts to claim private-sector experience outside the field of law,” continued DeVore, and “75 percent of the Republicans earn a living in business, farming, or medicine….” All that can be found in his book, The Texas Model: Prosperity in the Lone Star State and Lessons for America.

The analysis was for a couple of years ago, but the makeup of both legislatures remains virtually the same.

California is replete with demands for “environmental justice,” “social justice,” “income justice,” “sexual justice,” “workplace justice” – oh, the list goes on and on. What California needs more of is “entrepreneurial Justice,” “business justice” and “tax justice.”

Gov. Jerry Brown and legislative leaders should reverse tax-confiscatory policies and refund overpayments to that LLC and others in similar positons. If not, California will perpetuate its mean-spiritedness towards corporations – even the one-person kind.

One focus of this blog has been to address California’s perennially difficult business environment. Joseph Vranich is known as The Business Relocation Coach while the formal name of his business is Spectrum Location Solutions. Joe helps companies find great locations in which to grow. Also, Joe has been a Keynote Speaker for more than 20 years – see A Speaker Throughout the U.S. and in Europe and Asia.

Special ‘California Alert’ to the U.S. Site Selection Community

October 21, 2014

California, long known to be unfriendly to business, is now inhospitable to site selection consultants. Gov. Jerry Brown’s Office of Business and Economic Development has banned commissions that have long been a tradition in the business in the United States and internationally. Or perhaps it’s better to say the state is limiting commissions.

According to the Sacramento Business Journal, the agency, known as GO-Biz, has placed on ban on commissions to consultants for aiding companies in securing a tax credit should they decide to move to or expand in the state.(1)

Since the story appeared, one consultant clarified that commissions are still permissible under some circumstances, but the state limits the ability for consultants to earn more than what the state deems reasonable.

Regardless of whether it should be called a ban or a limitation, a tax consultancy firm has filed suit against what it calls “regulatory overreach that impacts the ability of taxpayers to obtain representation to pursue their right to a tax credit for driving economic growth and job creation.”

In all candor, the GO-Biz restriction doesn’t affect my business.

My projects are done on a flat-fee basis, so no commissions are involved. Moreover, a good part of my client work involves companies seeking out-of-California locations with friendlier business environments.

When I’ve had companies interested in establishing a presence in California, I “ran the numbers” on a completely objective basis. The data on taxes, workers’ compensation, unemployment insurance, cap-and-trade fees to reduce global warming – and more and more – caused them to do what I call a “U-Turn” and head off to other states.

Said one client, “We knew California was going to be more expensive, but we thought we could afford to move there anyway so we began the planning.” After reviewing the cost comparisons with its current community, the company will stay put in its Mountain Time Zone location.

California’s voters seem determined to reelect politicians who could be called “California’s Wrecking Crew” – people who are hostile to business, love hiking taxes again and again, and waste tax dollars on boondoggles – with Gov. Jerry Brown but one example.

The state’s business environment is sure to worsen in 2015, 2016, and who knows for how long after that. Doubters should consider Gov. Brown’s plan to toughen carbon regulations to an unprecedented degree, thus increasing costs (again) on all businesses in every part of the state.

When that happens, Sacramento will once more demonstrate that it’s the “marketing department” for the site selection consulting profession.

(1) See: Allen Young, “Dallas company sues GO-Biz over tax credit,” Sacramento Business Journal, Oct. 3, 2014 http://www.bizjournals.com/sacramento/news/2014/10/03/dallas-company-sues-go-biz-administration-over-tax.html

One focus of this blog has been to address California’s perennially difficult business environment. Joseph Vranich is known as The Business Relocation Coach while the formal name of his business is Spectrum Location Solutions. Joe helps companies find great locations in which to grow. Also, Joe has been a Keynote Speaker for more than 20 years – see A Speaker Throughout the U.S. and in Europe and Asia.

Stunning: California Imposes 5-Year Retroactive Tax Bill on Startup Investors

January 30, 2013

Thanks to an entrepreneur, Brian Overstreet, we in California are just starting to learn that the state Franchise Tax Board has cancelled the Qualified Small Business (QSB) tax benefits and is retroactively denying the benefits for the past five years.

Overstreet explained in a column in Xconomy that the QSB was designed to incentivize people starting business to keep them in California. If so, founders and early investors could exclude 50 percent of the taxable gain on the sale of their stock—meaning about 4.5 percent instead of 9 percent (now nearly 13 percent due to Proposition 30).

“Without the QSB provision, we might have decamped to a more tax- and business-friendly state,” he wrote. “After we completed the sale, I paid both my federal and state estimated taxes computed with the QSB exclusion. I thought I was clear until April 2013.”

But, on December 21, the FTB retroactively disqualified all exclusions and deferrals going all the way back to 2008.

How this came about is due, in part, to the FTB overreacting to a court ruling.

“What does this mean for you?” asks Overstreet.

1. If you are a business founder or early investor who sold stock since 2008 and took the QSB exclusion: Surprise! You are going to get a bill from the FTB for the 50 percent of the taxes you excluded plus interest plus possible penalties.

2. If you are a business founder or early investor and have not yet sold stock: Rethink your business and tax planning strategies. Consider whether it’s fiscally prudent to stay in California.

3. If you a contemplating starting or investing in a California business: Think long and hard. Consider out-of-state alternatives.

He adds, “Just at the moment when California is retroactively taxing entrepreneurs, the federal government is extending the federal QSB benefit.”

Those affected will pay no federal capital gains tax, and in some states, no state taxes—but in California will pay up to 13 percent.

“Why in the world would any smart business person start or invest in a new California company facing that kind of penalty?”

“California changed the rules after the fact, and that’s just not right. More importantly, the FTB’s radical action is going to send a terrifying message that will have the unintended consequence of driving young, growing businesses to friendlier environments.”

Overstreet is correct—when it is right or moral to penalize  taxpayers who did nothing wrong? Nonetheless, my instinct tells me that entrepreneurs, inventors, investors and venture firms better pay those bills on time.

Congratulations to Xconomy for breaking this story, which still has gone under-reported.

See Brian Overstreet’s column at “California To Hit Startup Founders with Big Retroactive Tax Bills.”

An excellent story that explains the series of events written by Wade Roush, Xconomy’s chief correspondent and editor of Xconomy San Francisco, is “The Surreal, Ironic Story Behind California’s Retroactive Tax on Small Business Investors.”

The court decision is Cutler v. Franchise Tax Board.

Deloitte issued an alert entitled “California Franchise Tax Board Notice Implements Court of Appeal Decision Involving Qualified Small Business Stock Gain Exclusion/Deferral.”

One focus of this blog has been to address California’s perennially difficult business environment. Joseph Vranich is known as The Business Relocation Coach while the formal name of his business is Spectrum Location Solutions. Joe helps companies find great locations in which to grow. Also, Joe has been a Keynote Speaker for more than 20 years – see A Speaker Throughout the U.S. and in Europe and Asia.