California residency tax planning for business owners who are moving
Moving a business owner out of California raises several questions: your personal residency, the source of your income and the business's continuing California obligations. Changing an address is not a complete answer to all three.
Start the review before committing to a move or transaction where possible. Give an adviser a dated account of the facts rather than asking for a universal number of days that makes California tax disappear.
Separate the three reviews
| Review | What to explain |
|---|---|
| Personal residency | Where you live, the nature of the move and the connections relevant to your circumstances |
| Income sourcing | How income is earned, the relevant services, property and business activity |
| Entity obligations | Where the business continues to operate and its other California connections |
An owner can need more than one of these analyses at the same time. Ask which adviser is responsible for each and how the findings will be coordinated.
Understand the resident and nonresident distinction
The FTB explains that a part-year resident is taxed on worldwide income during the California-resident period and California-source income during the nonresident period. A nonresident can still owe California tax on income from California sources. [1]
The FTB lists examples including income from California real property and a California business, trade or profession. [1] Consequently, moving personally does not establish that income from retained operations or property has ceased to involve California.
Request a review of each material income stream. Wages, business income, property income and transaction proceeds should not all be put into one category simply because they reach the same bank account.
Explain how services are performed and sold
The FTB's examples distinguish an employee performing services in California from an independent contractor or sole proprietor whose customer receives the benefit of services in California. [1] The sourcing questions are therefore not identical for every working arrangement.
Tell the adviser whether an amount is wages, a business receipt or another type of income and provide the relevant facts. Do not assume that working remotely from another state establishes the treatment of every payment.
Ask separately about deferred or equity-based compensation where relevant. The FTB flags special rules in its relocation examples. [1] A routine salary analysis may not answer the questions raised by stock awards or earlier services.
Review what the business leaves in California
List retained offices, employees, property, operating entities and customer relationships. Ask which facts affect income sourcing and which can create continuing business-filing obligations.
The FTB's doing-business guidance addresses business activity and specified economic connections. [2] A formation address outside California does not, by itself, establish that the business has no California obligations.
For an owner with several entities, prepare a separate row for each entity and its activities. That helps avoid treating a property company and an operating company as though their facts were interchangeable.
Build a factual timeline
Record the planned and actual move dates, periods of travel, changes in working arrangements, retained locations and dates of material transactions. Keep the supporting evidence your adviser identifies.
Describe what is settled and what remains a plan. If a business sale is being negotiated, provide the actual proposed transaction type and timing. A statement that you expect to move before closing is not a substitute for analysis of the relevant facts and income.
For owners earning $500,000 or more personally before tax, explain recurring income separately from the possible sale price. Transaction value, business turnover and personal annual income answer different questions.
Ask for a coordinated written conclusion
Request the assumptions, issues requiring further evidence, expected filings and responsibilities for follow-up. Ask what would change the analysis, such as keeping an operating location or altering the transaction timetable.
If more than one state is involved, identify who addresses the other state's treatment. Do not accept a California-only conclusion as a complete assessment of the move's overall consequences.
This guide provides questions for a review, not a residency determination, a safe-harbor calculation or an assurance that a move eliminates tax. A defensible decision needs current rules applied to your actual situation.
Discuss my move and California business tax questions
Related resources
- Selling a business California taxes
- California QSBS tax treatment
- California tax planning for established business owners
Sources
[1] California Franchise Tax Board, Part-year resident and nonresident.
[2] California Franchise Tax Board, Doing business in California.