California Wants Small-Business Owners To Pay Back $120 Million In Tax Breaks

SACRAMENTO (CBS13) — Small-business investors in California were promised big breaks five years ago, but now they're being told to pay up, instead after a court ruling.

After following the law, many of them are getting hit with tax bills as high as $250,000.

"When we make a promise, we have to uphold it," said Sen. Ted Lieu, D-Redondo Beach.

But that is not what the state government appears to be doing. Small-business owners are getting hefty tax breaks for tax credits they already got five years ago.

"They relied on California law as it was written, that they would get a tax break if they invested in certain kinds of businesses," Lieu said.

But a court ruled in December that practice by the state was unconstitutional. Now, the Franchise Tax Board wants its money.

And it's killing small businesses, says Ken DeVore, with the National Federation of Independent Businesses.

"It sends a message that you can't trust government. If you comply in good faith with the rules, they can go back and penalize you."

It's estimated that 2,000 small-business investors will have to pay these retroactive taxes. If the senator's bill doesn't pass, they'll be out up to $120 million.

"A lot of them don't have that money anymore. Its been reinvested," DeVore said.

Lieu says it's not as if the state is counting on the case. The $120 million would be a surprise windfall for the state.

"They obviously can't go backwards 5 years in time and change their investment or change what they did." he said. "They are stuck with what they did and its unfair to penalize them."

Investors who could be hit by the retroactive taxes did not want to go on camera, fearing they would become an easy target for the Franchise Tax Board.

The board doesn't comment on pending legislation, but a department review of the bill reveals they haven't yet taken a position on it.