My wife is a UK citizen with a green card. We are living in the California with our son although last year she was in the UK for 241 days. She owns a school in the UK. It is a corporation. She was paid both wages and dividends from her school. She also got some interest income in the UK. None of the money was remitted to the US.

How should we handle her income in the US? My understanding is that she does not owe US taxes since her income was taxed in the UK but maybe she owes California. Is that correct? What forms do we need to get this straight?

That is NOT correct.

U.S. citizens, green card holders and resident aliens are liable for U.S. taxes on ALL world-wide income. You can partially offset the effect of these taxes by applying for the Foreign Tax Credit (Form 1116). Your wife does NOT qualify for the Foreign Income Exclusion.

Yours is a pretty complex tax situation. You should get professional tax help by someone experience in international tax matter.

Since the rush is over, I am available. PM me if you are interested.