California’s Governor Brown has signed a bill (AB 525) which extends the life-span of the Board of Equalization’s (BOE) Offer in Compromise program for an additional 5 years. Offer in Compromise is a state program that allows small businesses to mitigate tax burden by allowing them to pay a negotiated amount to avoid having to file bankruptcy.
This is great news for small business as Offer In Compromise is a valuable way of mitigating tax liability. The purpose of the bill is to extend small business owners opportunity to save their businesses where they might otherwise be forced to close as a result an obligation they can’t meet.
Prior to AB 525, the Offer In Compromise program had a “sunset date” of January 1, 2018. Rather than lose this mutually beneficial tool, this allows the state and business to continue to negotiate a solution both can live with.
“The Offer in Compromise program is an important tool to small business owners struggling to pay their taxes, and we are pleased to see the sunset extended five years,” says Tom Scott, state executive director of the National Federation of Independent Businesses California
A Small Business & Entrepreneurship Council study recently conducted designated California as having the worst tax system in the United States. 94 percent of businesses file as individuals and the 13.3 percent personal income, capital gains, and dividends and interest tax rates pose a tremendous challenge for small business. This fact makes access to capital all the more difficult which increases the difficulty small business faces here.
“The tax code is not easy to understand and mistakes happen, especially in smaller businesses with fewer resources to ensure they are filing correctly. It is not uncommon for a business to incur a tax liability they didn’t realize they would be responsible for paying,” says Assemblywoman Cecilia Aguiar-Curry, D-Winters, author of the measure.
In order to qualify for OIC, the liability due must be a result of failing to collect taxes from retail transactions. A typical situation is one where a business doesn’t realize that they ought to have charged sales tax for transactions. Once realized, these past taxes can’t be collected from past customers and the business finds itself with a tax liability it can’t pay.
It is in the best interest of the State for the program to continue. Since 2009, the BOE has negotiated offers from 54 active business, 42 of which are still operating thanks to this program. As a result of Offer In Compromise, the State of California has been able to collect more than $14 million in back taxes since 2009. Without the program, that tax income would have been lost.