2026 Tax Alert: The impact of California’s sourcing rules on asset managers

California has finalized amendments to its market-based sourcing regulations, and the implications for private equity fund managers are significant. Effective January 1, 2026, asset management fees must be sourced based on the domicile of the beneficial owner. This change demands immediate attention from CFOs and tax strategists across the asset management industry.

What Changed?

The final amendments clarify and standardize the sourcing of asset management fees. Prior to these changes, California’s sourcing rules for this industry were ambiguous. As a result, asset management companies would often source fees to the location of the fund or the manager, which helped minimize exposure to California’s tax obligations.

Under the new rules, California mandates a look-through approach:

• Receipts from asset management services must be allocated to California based on the average value of interests held by California-domiciled investors.
• The default presumption is that an investor’s billing address is their domicile, unless there is clear evidence of a different primary residence or principal place of business.
• If California-sourced receipts exceed the threshold amount ($735,019 in 2024), the manager may have a filing obligation, even without physical presence or payroll in California.

Strategic Implications for Fund Managers

California’s revised sourcing regulation essentially redefines the concept of the “customer” in asset management services. Historically, when sourcing management fees at the management company level, the fund was treated as the customer and management companies would often source revenue based on the fund’s location. Under the new rule, however, asset managers must look through the fund to the beneficial owners (i.e., the investors), who are now considered the true customers for sourcing purposes.

This change affects:

• Revenue Sourcing: Income from asset management services must now be allocated based on the domicile of each investor in the fund versus the domicile of the fund.
• Apportionment Calculations: The change introduces complexity into how private equity funds calculate their taxable income across states. Managers must now apply a look-through approach, allocating receipts proportionally based on the average value of interests held by California-domiciled investors.
• Nexus Determinations: Even firms with no physical presence in California may have a filing obligation if their California-sourced receipts exceed the economic nexus threshold. This expands the scope of compliance and risk exposure.
• Compliance Obligations: Firms must now maintain robust documentation to support domicile determinations, especially when an investor’s billing address differs from their actual residence or principal place of business. Failure to do so could result in misallocated revenue and potential audit exposure.

Example

Asset Management Company, domiciled in North Carolina, oversees an equity fund with $100 million in assets. If $20 million of the fund’s assets are held by California-domiciled investors, then 20% of the management fees received by Asset Management Company must be sourced to California. If this amount exceeds California’s nexus threshold for the tax filing year, the company is required to file California state income tax returns, even if it has no office or personnel in the state.

We Can Help

The 2026 tax year may feel distant, but the planning window is already open. Fund managers who act early and coordinate with experienced tax advisors and compliance teams will be best positioned to navigate California’s revised sourcing rules.

Here’s how we can support you:

• Strategic Tax Planning: We’ll help you model the impact of California’s sourcing rules on your fee streams and apportionment.
• Investor Domicile Mapping: Our tools and expertise can assist in validating and documenting investor locations to meet regulatory standards.
• System Readiness: We’ll work with your internal teams to align CRM, billing, and accounting systems with the new sourcing methodology.
• Filing Preparedness: From threshold analysis to filing obligations, we’ll guide you through what’s required to stay compliant.

Don’t wait to start preparing. Let’s make sure your fund is ready, resilient, and fully compliant when the new rules take effect.

Contact us today to start the conversation.

The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.