What Would Proposition 40 Do?

Proposition40 would impose a one-time tax of up to 5% on covered assets exceeding themeasure’s applicable $1 billion threshold.

Accordingto the California Legislative Analyst’s Office, the proposal would generallyapply to billionaires who were California residents on January 1, 2026. The taxwould become due in 2027.

Affectedtaxpayers could elect to spread their payments over five years. However, thetotal amount paid would be higher under the installment option.

Thisis different from California’s existing income-tax system. An income taxapplies to earnings and gains recognized during a particular period. A wealthtax is based on the value of covered assets, reduced by applicable liabilities,even when those assets have not been sold.

Which Assets Would Be Included?

Coveredassets would generally include:

·      Ownership interests in privately held businesses

·      Publicly traded stocks and other securities

·      Investment and partnership interests

·      Art and collectibles

·      Intellectual property

·      Certain trusts and other ownership arrangements

Realproperty, certain pensions, and some retirement accounts would generally beexcluded.

Forindividuals whose wealth is held primarily in publicly traded securities,establishing value may be relatively straightforward. For founders, privateinvestors, and family-owned enterprises, the process may be considerably morecomplicated.

Closelyheld companies do not always have readily observable market values. Valuationmay require an analysis of financial performance, ownership rights,marketability, control, intellectual property, and comparable transactions.

The Liquidity Challengefor Business Owners

Ataxpayer can have a very high net worth without holding an equivalent amount ofavailable cash.

Forexample, a founder may own a substantial interest in a private company whilereceiving a comparatively modest salary or distribution. A tax based on theappraised value of that ownership interest could create a liquidity requirementwithout a corresponding sale or taxable income event.

Thispossibility may lead affected taxpayers to evaluate:

·      Available cash and borrowing capacity

·      Planned distributions

·      Potential asset sales

·      Ownership and trust structures

·      Business valuation documentation

·      Succession and estate-planning strategies

·      California residency and domicile records

Businessesthemselves may also be affected indirectly. A major shareholder facing apersonal liquidity obligation could request distributions, pursue financing,sell shares, or reconsider the timing of a transaction.

Anyaction taken in anticipation of Proposition 40 should be reviewed carefully.The measure includes provisions intended to address avoidance, and residencydecisions involve considerably more than changing a mailing address.

How Would the Revenue Be Used?

Themeasure would allocate 90% of the tax revenue to healthcare. The remaining 10%would be allocated to food assistance or education-related programs, as well asadministration of the tax.

California’sLegislative Analyst’s Office estimates that the measure could generate tens ofbillions of dollars in temporary state revenue over several years.

Thesame analysis also identifies a possible long-term reduction in stateincome-tax revenue of hundreds of millions of dollars or more annually. Thiscould occur if affected taxpayers leave California or otherwise change theirfinancial behavior. The exact fiscal outcome is difficult to estimate becauseasset values, residency decisions, and taxpayer responses could changesubstantially.

What Should PotentiallyAffected Taxpayers Do Now?

Proposition40 has not yet been approved, so taxpayers should avoid making irreversibledecisions based solely on the assumption that it will become law.

However,potentially affected individuals, trusts, family offices, and closely heldbusinesses can begin preparing by:

1.      Creating an inventory of significant assets andliabilities.

2.      Reviewing the ownership of private businesses,partnerships, trusts, and intellectual property.

3.      Confirming that business valuations andownership records are current.

4.      Modeling potential tax exposure under differentvaluation assumptions.

5.      Evaluating liquidity under immediate andinstallment-payment scenarios.

6.      Reviewing California residency and domiciledocumentation.

7.      Monitoring related ballot measures that couldaffect the implementation of Proposition 40.

Preparationdoes not mean assuming the tax will pass. It means understanding how theproposal could affect personal wealth, business ownership, liquidity, andlong-term planning.

How The Accountancy Can Help

The Accountancy works with business owners, executives,investors, and high-net-worth individuals facing complex tax, valuation, andfinancial-planning decisions.

Our professionals can help evaluate potential exposure,organize financial information, coordinate business valuations, assessliquidity, and model how proposed tax changes could affect both an individualand the underlying business.

Proposition 40 remains a developing matter. Starting theanalysis early can provide more options and reduce the pressure of making majorfinancial decisions after an election result is known.

This article is intended for generalinformational purposes only. It does not constitute individualized tax, legal,valuation, investment, or residency advice. Taxpayers should consult qualifiedprofessional advisors regarding their specific circumstances