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State of California Franchise Tax Board

Changes to 2012 Forms

Updates to the Schedule D (565) on 03/07/2014 –– Capital Gain or Loss

We replaced text on the Instructions, Page 1, Column 2, Qualified Small Business Stock

Previous Version

Qualified Small Business Stock
In Cutler v. Franchise Tax Board (2012) 208 Cal App 4th 1247, 146 Cal Rptr. 3d 244, the California Court of Appeal found that the California qualified small business stock (QSBS) provisions of R&TC Sections 18038.5 and 18152.5 discriminated against interstate commerce in violation of the Commerce Clause of the United States Constitution. R&TC Sections 18038.5 and 18152.5 provided for a California deferral and exclusion of gain from the sale of QSBS if eighty percent of the corporation’s property and payroll was located in California for substantially all of the taxpayer’s holding period of the stock. An unconstitutional statute is invalid and unenforceable. Therefore, the California deferral and exclusion are not available.

Revised Version

Qualified Small Business Stock
California law does not conform to federal law changes regarding the increase in the percentage of the gain exclusion for the sales of qualified small business stock acquired after February 17, 2009. California law allows an exclusion of 50% of any gain from the sale or exchange of qualified small business stock held for more than 5 years. For California purposes, 80% of the issuing corporation’s payroll must be attributable to employment located within California (at time of issuance). Also, at least 80% of the value of the corporation’s assets must be used by the corporation to actively conduct one or more qualified trades or businesses.

R&TC Section 18038.5 also provides for the deferral of gain from the sale of small business stock that has been held for six months or more, if qualified replacement stock is purchased within 60 days after the sale giving rise to the gain. Report gain deferred from the sale of qualified small business stock in accordance with the instructions contained in Revenue Procedure 98-48.

For more information, go to ftb.ca.gov and search for qsbs.

Reason for the changes

AB 1412 (Stats. 2013, ch. 546), signed by the Governor on October 4, 2013, retroactively allows the Qualified Small Business Stock (QSBS) deferral and 50 percent gain exclusion for tax years 2008 through 2012.

Impact

This revision may decrease the tax liability for taxpayers who did not report a QSBS exclusion or deferral for taxable years beginning on or after January 1, 2008.

Back to Tax Form Changes for 2012

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