California has the highest marginal individual income tax rate in the United States at 13.3% on income above $1 million. It imposes a franchise tax on every corporation, LLC, and partnership doing business in California - with an $800 annual minimum that applies even to entities with no revenue. And unlike most states, California has consistently refused to conform to federal bonus depreciation and many OBBBA business provisions, requiring a separate California tax calculation for any business with accelerated depreciation deductions.
Individual income tax: Nine brackets from 1% to 12.3%, plus a 1% mental health services tax on taxable income above $1,000,000 for all filing statuses (13.3% top rate). The 12.3% bracket begins at $742,953 for single filers (2025 schedule).
Franchise tax minimum: $800 for corporations, LLCs, and limited partnerships - due annually regardless of revenue or profit. A new corporation is exempt from the minimum tax in its first taxable year, but an LLC or limited partnership generally is not (the AB 85 first-year annual tax exemption for LLCs, limited partnerships, and LLPs applied only to taxable years beginning on or after January 1, 2021 and before January 1, 2024 - R&TC §§17935, 17941, 17948 - and has expired).
Capital gains: Taxed as ordinary income. No preferential rate. A California resident paying 23.8% federal (20% + 3.8% NIIT) on long-term capital gains adds up to 13.3% California tax - combined effective rate up to 37.1%.
California does not conform to federal bonus depreciation under IRC §168(k). California allows no bonus depreciation at all, regardless of the federal rate (which varies based on placed-in-service date and OBBBA modifications). A California business that takes $1 million of federal bonus depreciation must add back the excess on their California return, creating a California depreciation addback that increases California taxable income above federal.
California has not conformed to most OBBBA business provisions. The §174A R&D capitalization changes, new bonus depreciation rates, and most OBBBA deduction changes do not apply for California purposes until the California legislature enacts specific conformity legislation - which it has historically done selectively and years after federal enactment. Practitioners should not assume federal and California taxable income are the same for any business with capital expenditures, R&D, or other OBBBA-affected items.
California taxes its residents on all worldwide income. A person who claims to have left California must demonstrate that their California domicile was genuinely abandoned and a new domicile established elsewhere. The 546-day safe harbor (R&TC §17014(d) and FTB Publication 1031) is narrower: an individual domiciled in California who is absent from California under an employment-related contract for an uninterrupted period of at least 546 consecutive days is considered a nonresident during the absence (returns to California totaling no more than 45 days in a taxable year are disregarded).
California taxes nonresidents on California-source income, which includes: wages for services performed in California, income from a California trade or business, gain from California real property, and California-sourced pass-through entity income. A New York resident who is a partner in a California-based law firm partnership has California-source income from their share of California business income. Remote workers employed by California companies may have California-source income if they perform services in California, depending on facts and the employer's apportionment.