M&A Advisory in California

California imposes nine graduated personal income tax brackets from 1% to 12.3%, plus a 1% Mental Health Services Tax surcharge on taxable income over $1,000,000 (R&TC §17041), yielding a 13.3% top marginal rate. All capital gains are taxed as ordinary income — no preferential long-term rate. Under AB 150's Small Business Relief Act (R&TC §17052.10/§19900), a qualified pass-through entity may elect to pay a 9.3% entity-level PTE tax with a matching California credit (5-year carryforward). SB 132 (June 27, 2025) extended the PTE regime through tax year 2030; missing the June 15 prepayment no longer voids the election but reduces owners' credits by 12.5% of the shortfall.

California does NOT conform to IRC §1202 — the state repealed its partial QSBS exclusion in 2013 (SB 209) after the Cutler decision. Even when a founder qualifies for the 100% federal QSBS exclusion (up to $10M pre-OBBBA, or $15M for QSBS acquired after July 4, 2025 under OBBBA's tiered 50%/75%/100% exclusion), California taxes the full gain at up to 13.3% — meaning a $30M QSBS exit can generate ~$4M of California-only tax. Planning must rely on pre-sale non-grantor trusts in conforming jurisdictions (NV, SD, DE), pre-sale residency changes documented 18–24 months in advance, or charitable structures.

A California asset sale subjects tangible personal property to sales/use tax at a 7.25% state base rate (8.5%–10.25% with local add-ons); most one-time business sales qualify for the occasional-sale exemption under R&TC §§6006.5, 6367. Buyers must navigate California's Bulk Sales Law (Commercial Code Division 6) requiring recorded creditor notice 12+ business days pre-closing plus CDTFA, EDD, and FTB tax-clearance certificates. Every California entity pays an $800 minimum annual franchise tax; LLC gross-receipts fees run up to $11,790 at ≥$5M revenue. Multistate sellers must model single-sales-factor apportionment and the throwback rule.

California has NO state estate tax or inheritance tax (Proposition 6, 1982) — only the federal regime applies, with the full IRC §1014 step-up in basis at death available. However, Proposition 19 (effective February 16, 2021) sharply limited the parent-child reassessment exclusion for real property: only a family home transferred to a child as primary residence within one year qualifies, capped at taxable value plus $1,044,586 of market value for transfers from February 16, 2025 through February 15, 2027. Commercial and rental real estate transfers between parents and children now trigger full Prop 13 reassessment to FMV.

California's research credit (R&TC §§17052.12, 23609) allows 15% of excess California-conducted QREs over a base amount, plus 24% of basic research payments to qualifying California universities; unused credit carries forward indefinitely. However, a $5M annual business-credit usage cap applies for tax years 2024–2026 (AB 150/SB 113), with a refundable-election option for smaller businesses. Unused amounts continue to carry forward; the cap disproportionately affects larger LMM sellers with significant R&D credit carryforwards who may find the credits partially stranded in the sale year.

Under B&P Code §16600 as amended by AB 1076 and SB 699 (effective January 1, 2024), virtually all employment non-competes are void in California — including for remote California residents employed by out-of-state companies. Only the §16601 "sale of business goodwill" exception remains enforceable: non-competes may be imposed on a seller of a business as part of the goodwill sale, or on an owner selling their interest. Retention design for California sellers must rely on §16601 sale-of-business covenants, rollover equity with performance vesting, and earn-outs with personal-service components. Non-compliant non-compete agreements also trigger PAGA penalty exposure.