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: Ten brackets from 1% to 13.3%. The 13.3% rate (which includes the 1% mental health services surcharge) applies above $1,000,000 for single filers.
Franchise tax minimum: $800 for corporations, LLCs, and limited partnerships - due annually regardless of revenue or profit. A new LLC is exempt only in its first taxable year.
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). For recent tax years, California allows a 20% first-year bonus on qualifying property rather than 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 FTB's 546-day safe harbor (from Legal Ruling 2009-01 and FTB Publication 1031) provides a rebuttable presumption: a taxpayer who maintains a domicile outside California and spends fewer than 546 days in California during any consecutive two-year period is presumed to not be a California resident for those years.
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.