Selling Your California Home in 2026: Tax Exclusions, Capital Gains, and What’s Changed

Summer is peak home-selling season in California — and if you’re planning to sell in 2026, the tax implications are more complex than in previous years. The One Big Beautiful Bill Act (OBBBA) preserved the home sale exclusion and stepped-up basis but changed the SALT cap, restored bonus depreciation (affecting rental-to-primary conversions), and left California’s capital gains rate untouched at up to 13.3%. Add in Proposition 19’s impact on inherited properties, and selling a home in California requires careful tax planning.

At The Law Office of Pietro Canestrelli, we help homeowners across Temecula, San Diego, Riverside, San Bernardino, and throughout California understand and minimize the tax consequences of selling their homes. Here’s what you need to know in 2026.

The Primary Residence Exclusion: $250,000 / $500,000

Under IRC Section 121, you can exclude up to $250,000 in capital gains ($500,000 for married couples filing jointly) from the sale of your primary residence. This exclusion is available if you meet two tests:

• Ownership test: You owned the home for at least 2 of the 5 years before the sale
• Use test: You used the home as your primary residence for at least 2 of the 5 years before the sale

The 2 years don’t have to be consecutive — they just need to total 24 months within the 5-year lookback period. You can generally use this exclusion only once every 2 years.

For many California homeowners, especially those who purchased their homes 10-20+ years ago, appreciation has exceeded the exclusion. A home purchased for $300,000 in 2005 and sold for $950,000 in 2026 produces $650,000 in gain — of which only $500,000 is excludable for a married couple. The remaining $150,000 is subject to both federal and California capital gains tax.

For more detail on the exclusion rules, see our taxes on home sales page.

California Capital Gains: The State Bite

California taxes capital gains as ordinary income — meaning the state doesn’t offer a preferential capital gains rate. For high-income sellers, the California tax rate on home sale gains can reach 13.3% (the top marginal rate on income above $1 million).

Combined with the federal long-term capital gains rate of 15-20% (plus the 3.8% Net Investment Income Tax for high earners), the total tax burden on a non-excluded home sale gain in California can exceed 37%.

For a married couple with $200,000 in non-excluded gain, the combined federal and California tax could approach $60,000-$74,000 depending on their overall income. This is why the exclusion is so valuable — and why maximizing it through proper planning is critical.

What If You Don’t Qualify for the Full Exclusion?

Several common situations can limit or eliminate the Section 121 exclusion:

Partial Exclusion

If you don’t meet the 2-year ownership or use requirement, you may qualify for a partial exclusion if the sale was due to a change in employment, health reasons, or unforeseen circumstances. The partial exclusion is prorated — if you lived in the home for 1 year out of the required 2, you can exclude up to 50% of the maximum ($125,000 single / $250,000 joint).

Rental-to-Primary Conversion

If you converted a rental property to your primary residence, special rules apply. You can use the Section 121 exclusion, but gain attributable to depreciation claimed after May 6, 1997 is not excludable. This “depreciation recapture” is taxed at a flat 25% federal rate — plus California’s ordinary income rate.

Additionally, gain attributable to periods of non-qualified use (rental use) after January 1, 2009 is not eligible for the exclusion. For California business owners who have rented out their homes, the calculations can be complex. Our team can help you model the tax impact before you list.

High-Income Sellers and the NIIT

Sellers with modified adjusted gross income above $200,000 (single) or $250,000 (joint) may owe the 3.8% Net Investment Income Tax (NIIT) on the non-excluded portion of their home sale gain. The NIIT applies to the lesser of net investment income or the excess of MAGI over the threshold. For a couple with $300,000 in ordinary income plus a $200,000 non-excluded gain, the NIIT could add $7,600 to the tax bill.

The SALT Cap and Mortgage Interest: New Math in 2026

The OBBBA’s increase of the SALT cap to $40,000 affects home-related deductions in two ways:

• Property tax deduction: If you sell mid-year, your property tax deduction for 2026 is prorated based on your ownership period. Under the $40,000 cap, more homeowners can fully deduct their property taxes — but only if they itemize.
• Mortgage interest: Interest on up to $750,000 of acquisition indebtedness ($1 million for loans originated before December 15, 2017) remains deductible. The combination of higher SALT cap + mortgage interest makes itemizing more attractive for homeowners than it was under the $10,000 cap.

Read our SALT deduction guide and mortgage interest deduction article for more detail.

1031 Exchanges: Deferring Gains on Investment Properties

The Section 121 exclusion applies only to primary residences. If you’re selling an investment or rental property, the exclusion is not available — but you may be able to defer capital gains through a 1031 like-kind exchange.

A 1031 exchange allows you to sell a qualifying property and reinvest the proceeds into a “like-kind” replacement property within strict time limits (45 days to identify, 180 days to close), deferring all capital gains tax. The OBBBA preserved 1031 exchanges — there was no change to these rules.

Key considerations for California sellers:

• California follows federal 1031 rules, but if you exchange a California property for one in another state, California may “claw back” deferred gains when the replacement property is eventually sold
• The exchange must be facilitated by a Qualified Intermediary — you cannot touch the proceeds
• Both the relinquished and replacement properties must be held for investment or business use

For high-value investment properties, a Deferred Sales Trust may offer additional flexibility beyond a traditional 1031 exchange.

Proposition 19 and Selling Inherited Property

If you inherited a California property from a parent or grandparent, Proposition 19 (effective February 2021) significantly affects your tax calculation on sale. Under Prop 19:

• You receive a stepped-up basis for federal and California income tax purposes (your basis is the property’s fair market value at the date of death — not the original purchase price)
• However, the property is reassessed to current market value for property tax purposes unless you use it as your primary residence (and even then, the reassessment exempts only the first $1 million of value above the assessed value)

This means selling an inherited property often produces minimal capital gains tax (due to the stepped-up basis) but may have already triggered higher property taxes during the period you held it. Understanding both the income tax and property tax implications is essential.

See our article on estate tax tips for Californians for more on inherited property planning.

Timing Your Sale for Tax Efficiency

The timing of your home sale can significantly affect your tax liability:

• Sell in a low-income year: If you’re retiring, between jobs, or expect lower income this year, the gain may fall into a lower bracket
• Complete the 2-year use test: If you’re close to 2 years of primary residence use, waiting a few months can make the difference between a full exclusion and partial or no exclusion
• Coordinate with other gains and losses: Capital losses from stock sales or other investments offset home sale gains — harvest losses strategically
• Consider installment sales: Spreading the gain over multiple years through a structured installment sale can keep you in lower brackets and reduce NIIT exposure

Let Us Help You Plan Your Home Sale

Selling a home in California is one of the largest financial transactions most people ever make — and the tax consequences can range from zero (full exclusion) to hundreds of thousands of dollars. At The Law Office of Pietro Canestrelli, we help homeowners across Temecula, San Diego, Riverside, San Bernardino, and throughout California plan their sales for maximum tax efficiency.

Planning to sell your home? Contact our office before you list. A pre-sale tax consultation can save you far more than it costs.

Getting Married This Summer? Tax Implications Every California Couple Should Know

Congratulations on your upcoming wedding! Between venues, guest lists, and honeymoon plans, taxes are probably the last thing on your mind — but a few smart moves now can save you thousands of dollars and prevent unpleasant surprises next April. At The Law Office of Pietro Canestrelli, we help newlyweds across Temecula, San Diego, Riverside, San Bernardino, and throughout California start their married life on solid financial footing.

Your Filing Status Changes Immediately

The IRS determines your filing status based on your marital status on December 31. If you marry any time in 2026 — whether June 1 or December 30 — you’re considered married for the entire 2026 tax year. This means you’ll file as either Married Filing Jointly (MFJ) or Married Filing Separately (MFS) for all of 2026.

For most couples, filing jointly produces the lower tax bill because of wider tax brackets, higher standard deduction ($32,200 vs. $16,100), and eligibility for credits and deductions that are reduced or eliminated when filing separately. However, there are situations where filing separately makes sense — particularly when one spouse has significant student loan payments under an income-driven repayment plan, substantial medical expenses, or liability concerns.

The Marriage Penalty vs. Marriage Bonus

Depending on your incomes, marriage can either increase or decrease your combined tax bill:

• Marriage bonus: Couples with unequal incomes typically benefit. When one spouse earns $200,000 and the other earns $40,000, the combined income is spread across wider joint brackets, reducing the total tax compared to two single returns.
• Marriage penalty: Couples with similar high incomes may pay more when filing jointly because their combined income pushes them into higher brackets faster. The OBBBA’s permanent TCJA brackets mitigate this somewhat, but the penalty still exists — particularly at the top rates and for California’s progressive state tax.

Run both scenarios before your first joint filing to determine which status produces the better result.

Update Your W-4 Withholding

One of the most common tax mistakes newlyweds make is failing to update their W-4 forms after marriage. If both spouses continue withholding as “Single,” the combined withholding may be too high (resulting in a large refund — money you could have used throughout the year) or too low (if the combined income pushes you into higher brackets).

After marriage, submit new W-4 forms to your employers reflecting your new filing status. Use the IRS Tax Withholding Estimator tool to determine the right withholding amount. For California, also review your DE-4 form with your employer to ensure state withholding is appropriate.

The Home Sale Exclusion Doubles

If either spouse owns a home before the marriage, getting married can affect the home sale tax exclusion:

• Single: Exclude up to $250,000 in capital gains from the sale of a primary residence
• Married filing jointly: Exclude up to $500,000 — but both spouses must meet the use test (2 out of 5 years), and at least one spouse must meet the ownership test

If you’re planning to sell a home after marriage, timing matters. If only one spouse has lived in the home for 2 years, you may need to wait until the other spouse also meets the use test to claim the full $500,000 exclusion. In California’s expensive real estate markets — where gains routinely exceed $250,000 — the difference between a $250,000 and $500,000 exclusion can save $35,000-$65,000 in combined federal and state taxes.

Combining Tax Debts: Protect Yourself

If your spouse owes back taxes, filing jointly can expose your refund to offset. The IRS will apply a joint refund to either spouse’s outstanding tax debt. To protect yourself:

• Injured Spouse Claim (Form 8379): If your refund is seized to pay your spouse’s pre-marital tax debt, Form 8379 requests that your portion of the refund be returned to you
• Innocent Spouse Relief: If your spouse underreported income or claimed fraudulent deductions without your knowledge, you may be eligible for relief from the resulting tax, penalties, and interest
• Consider filing separately: If your spouse has significant tax problems, filing separately shields you from joint liability — though at the cost of higher combined taxes

Read our detailed article on marrying someone with tax debt and our guide on protecting yourself when your spouse has tax trouble.

Student Loan Considerations

Marriage affects student loan repayment plans — and with the ARPA student loan tax exclusion expiring on January 1, 2026, the tax consequences of loan forgiveness have changed significantly:

• Income-Driven Repayment (IDR) plans: When you file jointly, both spouses’ incomes are counted in calculating your monthly IDR payment — potentially increasing payments significantly. Some couples choose to file separately to keep payments lower, but this comes with the tax penalties of MFS filing.
• Forgiveness is taxable again: Starting in 2026, IDR forgiveness after 20-25 years is taxable as federal income. Planning for this potential “tax bomb” should start now — not 20 years from now.

OBBBA Changes That Affect Newlyweds

Several OBBBA provisions are particularly relevant for newlyweds in 2026:

• Standard deduction of $32,200 (MFJ): More generous than two single returns at $16,100 each — same total, but the joint return gets access to credits and deductions unavailable to MFS filers
• SALT cap of $40,000: The same $40,000 cap applies to both single and joint filers — meaning marriage doesn’t double the SALT cap. Two single filers can each deduct $40,000 ($80,000 total), while a married couple is limited to $40,000 combined. This is a genuine marriage penalty for high-SALT couples.
• Child tax credit of $2,200 per child: Available on joint returns for children under 17. The credit phases out at $400,000 MAGI for joint filers (vs. $200,000 for single filers).

Name and Social Security Changes

If either spouse changes their name after marriage, the Social Security Administration (SSA) must be notified before filing a return with the new name. The IRS matches names against SSA records, and a mismatch can delay refund processing or reject the electronic filing.

File Form SS-5 with the SSA, then wait until your new Social Security card arrives before filing your tax return with the new name.

California Community Property: What’s Yours Is Theirs (Mostly)

California is a community property state, meaning all income earned and assets acquired during the marriage are presumed to be owned equally by both spouses. This has significant tax implications:

• All wages earned by either spouse during the marriage are community income — even if only one spouse works
• If you file separately, each spouse reports 50% of all community income
• Property acquired during marriage is presumed community property unless specifically documented otherwise

Understanding community property rules is essential for proper tax filing — and for protecting assets in the event of a future separation.

Start Your Marriage on Strong Financial Footing

At The Law Office of Pietro Canestrelli, we help newlyweds across Temecula, San Diego, Riverside, San Bernardino, and throughout California navigate the tax implications of marriage — from withholding adjustments and filing status decisions to protecting against spousal tax liability and planning for the future.

Getting married this summer? Contact our office for a newlywed tax planning consultation. A few proactive steps now can save thousands later.

Your Mid-Year Tax Check-Up: 10 Moves to Make Before June 30

Memorial Day marks the unofficial start of summer — and it’s also the perfect time for a mid-year tax review. Half the year’s income is in the books, Q2 estimated payments are due June 15, and the One Big Beautiful Bill Act has changed enough rules that your January assumptions may need updating. At The Law Office of Pietro Canestrelli, we help taxpayers across Temecula, San Diego, Riverside, San Bernardino, and throughout California make smart mid-year adjustments that reduce their April 2027 tax bill. Here are 10 moves to consider before June 30.

1. Recalculate Your Estimated Tax Payments

If you pay quarterly estimated taxes, mid-year is the time to reassess. Your Q1 payment (April 15) was based on projections. Now you have five months of actual income data. Compare your projections to reality — and remember California’s 30/40/0/30 split means your June 15 payment should be 40% of your annual estimated liability, not 25%.

Key changes that may affect your estimates:

• OBBBA deductions you’re now eligible for (tips, overtime, auto loan, senior)
• Changes in business income or self-employment earnings
• Capital gains from stock sales or real estate transactions
• The higher SALT cap potentially changing your itemization calculation

Underpaying estimated taxes triggers penalties from both the IRS and the California FTB. Our article on estimated tax payments explains the rules in detail.

2. Review Your W-4 Withholding

The OBBBA’s new deductions may have reduced your federal tax liability — meaning your current withholding could be too aggressive. On the other hand, California’s nonconformity means your state liability hasn’t changed. Review both federal and California withholding to avoid over-withholding (an interest-free loan to the government) or under-withholding (a penalty-triggering surprise in April).

The IRS Tax Withholding Estimator (available at IRS.gov) can help you model the impact of the new deductions on your withholding needs.

3. Maximize Retirement Contributions

If you haven’t been contributing the maximum to your retirement accounts, mid-year is the time to increase your contributions:

• 401(k)/403(b): $23,500 limit for 2026 ($31,000 if age 50+; $34,750 if age 60-63 under the SECURE 2.0 super catch-up)
• Traditional/Roth IRA: $7,000 limit ($8,000 if age 50+)
• SEP-IRA: Up to 25% of net self-employment income, up to $70,000
• Solo 401(k): Up to $70,000 in combined employee/employer contributions ($77,500 with catch-up)

New for 2026: Under SECURE 2.0, catch-up contributions for employees earning over $150,000 must be made on an after-tax Roth basis. If you’re a high earner, ensure your payroll system is configured correctly.

4. Evaluate Your PTE Election (California Business Owners)

The California PTE elective tax prepayment deadline is June 15. If you own an S-corp, partnership, or multi-member LLC and haven’t yet evaluated whether the PTE election makes sense for your business, now is the time.

The PTE election allows your entity to deduct California state taxes at the entity level — bypassing the SALT cap entirely. At 9.3%, it’s a powerful tool for business owners with income above the SALT cap phase-out thresholds. Our business formation page explains entity-level election options.

5. Harvest Tax Losses (or Gains)

If your investment portfolio has losers, mid-year can be a strategic time to sell and “harvest” those losses. Capital losses offset capital gains dollar-for-dollar, and up to $3,000 in excess losses can offset ordinary income.

Conversely, if you’ve already realized significant gains in the first half of the year, you may want to identify positions with unrealized losses to offset those gains before December 31. Read our guide on stock market tax tips for more strategies.

6. Review Your Health Insurance and HSA

If you have a High Deductible Health Plan (HDHP), ensure you’re contributing to your Health Savings Account (HSA). HSA contributions are tax-deductible, grow tax-free, and can be withdrawn tax-free for qualified medical expenses. The 2026 limits are $4,300 for individual coverage and $8,550 for family coverage ($1,000 additional catch-up for age 55+).

HSA contributions for the current tax year can be made up until the following April 15 — but starting early means more time for tax-advantaged growth.

7. Check on Bonus Depreciation and Equipment Purchases

With 100% bonus depreciation now permanent, there’s less urgency to buy equipment before year-end. But if you’re planning a major purchase (equipment, vehicles, technology), buying before June 30 allows you to claim the deduction on your mid-year estimated payments — improving cash flow in Q3 and Q4.

Remember: California doesn’t conform to federal bonus depreciation, so the state tax benefit will be spread over multiple years regardless of when you buy. See our Section 179 deduction page for California-friendly alternatives.

8. Organize Your Crypto Records

If you’ve been trading cryptocurrency in 2026, the IRS is now receiving Form 1099-DA from custodial exchanges. Mid-year is the time to reconcile your trading records with your exchange reports, identify cost basis issues, and develop a tracking system for the rest of the year.

Pay special attention to:

• Transfers between wallets (which may cause cost basis gaps)
• DeFi transactions (staking rewards, liquidity pool income, airdrops)
• Tokens acquired before 2026 (cost basis reporting may not be available from exchanges)

Read our 2026 crypto tax reporting guide for comprehensive guidance.

9. Plan for Life Changes in the Second Half

Are you getting married, having a baby, buying or selling a home, starting a business, retiring, or sending a child to college? Each of these events has tax implications that are best planned for in advance — not discovered in April. Key planning opportunities include:

• Filing status changes (marriage affects brackets, eligibility for deductions, and student loan repayment plans)
• Home sale exclusion planning ($250K/$500K exclusion under Section 121)
• Education tax credits for college expenses
• Business formation timing to optimize first-year deductions

10. Address Any Outstanding IRS Issues Now

If you have unfiled returns, unpaid balances, unanswered IRS notices, or an ongoing audit, mid-year is the time to take action. The IRS enforcement process doesn’t pause for summer vacation — and addressing issues now gives you maximum leverage before year-end collection pushes.

• Unfiled returns: File delinquent returns to stop the clock on penalties and preserve resolution options
• Unpaid balances: Explore tax relief options before the IRS escalates to liens or levies
• IRS notices: Review our guide to common IRS letters and respond within the deadlines

Schedule Your Mid-Year Review

At The Law Office of Pietro Canestrelli, we offer mid-year tax planning consultations for individuals and businesses across Temecula, San Diego, Riverside, San Bernardino, and all of California. Whether you need to adjust estimated payments, evaluate entity elections, or resolve an outstanding IRS issue, our team can help you make the moves that matter before June 30.

Don’t wait until December. Contact our office to schedule your mid-year tax check-up today.

Small Business Tax Planning Under the New Law: What California Owners Need to Know in 2026

National Small Business Week (May 3–9, 2026) arrives at a moment when the federal tax code has been rewritten in ways that directly benefit — and complicate — the lives of small business owners. The One Big Beautiful Bill Act (OBBBA) made permanent several critical provisions, restored others, and introduced new wrinkles that every California business owner needs to understand.

At The Law Office of Pietro Canestrelli, we work with small business owners across Temecula, San Diego, Riverside, San Bernardino, and throughout California on business law and tax planning. Whether you run a sole proprietorship, LLC, S-corp, or C-corp, here’s what the new law means for your business in 2026 and beyond.

The QBI Deduction Is Now Permanent

The 20% Qualified Business Income (QBI) deduction under Section 199A was set to expire at the end of 2025. The OBBBA made it permanent — a major win for pass-through business owners (sole proprietors, partners, S-corp shareholders, and LLC members).

The QBI deduction allows eligible business owners to deduct up to 20% of their qualified business income from their individual tax return. For a business generating $200,000 in net income, that’s a $40,000 deduction — worth $8,800 to $14,800 in federal tax savings depending on bracket.

Key rules that remain in effect:

• The deduction phases out for specified service trades or businesses (SSTBs) — including law, accounting, consulting, health, and financial services — above $191,950 (single) or $383,900 (joint) for 2026
• For non-SSTBs above those thresholds, the deduction is limited by the greater of 50% of W-2 wages paid or 25% of W-2 wages plus 2.5% of qualified property
• The deduction is taken at the individual level — it doesn’t reduce self-employment tax

If your business is approaching the SSTB phase-out threshold, strategic income management — such as maximizing retirement contributions, timing expenses, or restructuring compensation — can preserve the deduction. Our tax planning guide explains who benefits most from proactive planning.

100% Bonus Depreciation Is Fully Restored

One of the most impactful OBBBA provisions for capital-intensive businesses: 100% first-year bonus depreciation is back and permanent. Under the TCJA, bonus depreciation had been declining — 80% in 2023, 60% in 2024, 40% in 2025. The OBBBA restored it to 100% retroactive to January 20, 2025.

This means you can deduct the full cost of qualifying assets — equipment, machinery, vehicles, certain building improvements — in the year they’re placed in service. No multi-year depreciation schedule. The entire expense hits your return in year one.

Critical California warning: California does not conform to federal bonus depreciation. The state follows its own depreciation schedule, which means you’ll claim different amounts on your federal and state returns. This creates a permanent state-federal difference that must be tracked year over year. Our Section 179 deduction page covers an alternative depreciation strategy that California does partially conform to.

Section 179 Limits Have Expanded

The OBBBA increased the Section 179 expensing limit and expanded the categories of property that qualify. Section 179 allows businesses to deduct the full purchase price of qualifying equipment and property in the year of purchase, subject to an annual limit.

The expanded limits mean more small businesses can fully expense capital purchases without needing to rely on bonus depreciation — which matters especially in California where bonus depreciation isn’t available.

Property that now qualifies for Section 179 treatment under the OBBBA includes certain qualified improvement property (QIP), such as interior improvements to non-residential buildings — a category that has had a complicated legislative history since the TCJA.

The Child and Dependent Care Credit Got a Major Boost — for Employers

The OBBBA dramatically expanded the employer credit for providing childcare assistance to employees. Businesses that establish or maintain qualified childcare facilities can claim credits of up to $500,000 to $600,000 — a substantial incentive for larger small businesses to invest in employee childcare benefits.

Additionally, the dependent care Flexible Spending Account (FSA) contribution limit was increased. For small business owners competing for talent in tight California labor markets, offering childcare benefits has become a tax-advantaged recruiting tool.

No-Tax-on-Tips and Overtime: What Business Owners Need to Know

While the no-tax-on-tips and no-tax-on-overtime deductions benefit employees, business owners should understand how they work for two reasons:

• Employee relations: Your tipped and overtime-eligible employees may have questions about how to claim these deductions. Being informed about the rules (and California’s nonconformity) positions you as a knowledgeable employer.
• Payroll implications: These deductions do not affect payroll taxes — FICA, FUTA, and California payroll taxes still apply to tips and overtime. The deductions are claimed on employees’ individual returns, not through payroll.

For California restaurant owners, read our article on no-tax-on-tips in California for a detailed breakdown. For guidance on overtime rules and how they interact with business taxes, see our piece on OBBBA overtime changes for business owners.

Tariff Impacts on California Small Businesses

While not strictly a tax law issue, the current tariff environment is creating significant cost pressures for California small businesses that import materials, components, or finished goods. The average effective tariff rate is approximately 12%, adding roughly $3,800 per household in costs — costs that flow through to businesses as higher input prices.

Tax strategies that can help offset tariff impacts include:

• Accelerating depreciation on equipment purchases (100% bonus depreciation or Section 179) to offset higher costs
• Evaluating R&D tax credits for businesses developing domestic alternatives to imported components
• Maximizing the QBI deduction to reduce effective tax rates on business income
• Exploring tariff-related duty drawback programs for businesses that re-export imported materials

Our article on tax strategies for managing tariffs provides additional detail.

California’s PTE Election: Still the Most Powerful SALT Tool

We covered this in our SALT cap analysis, but it bears repeating for business owners: the California Pass-Through Entity elective tax (at 9.3%) remains the single most powerful state tax reduction strategy for qualifying businesses.

The election is available to S-corps, partnerships, and LLCs taxed as partnerships. It’s been extended through 2030, and the June 15 prepayment deadline means now is the time to evaluate whether the election makes sense for your entity.

If you haven’t made the PTE election before, the process involves entity-level consent and timely payment. Our team can walk you through the requirements and help you model the tax savings.

Entity Selection Matters More Than Ever

The combination of permanent QBI deduction, restored bonus depreciation, the PTE election, and the SALT cap increase has changed the math on entity selection for many California businesses. A quick comparison:

• Sole Proprietorship: Simplest structure but no PTE election, no reasonable compensation planning, and self-employment tax on all net income. May work for very small or part-time businesses.
• LLC (taxed as partnership): PTE election available, QBI deduction available, but members pay self-employment tax on active income. California’s $800 minimum franchise tax applies regardless of income.
• S-Corporation: PTE election available, QBI deduction available, and the ability to split income between salary (subject to payroll taxes) and distributions (not subject to payroll taxes) can save thousands annually. Requires reasonable compensation and more administrative overhead.
• C-Corporation: Flat 21% federal rate, no QBI deduction, but no pass-through of income to individual rates. Best for businesses retaining significant earnings. Double taxation on distributions remains a consideration.

For a deeper comparison, read our articles on S-corporations, LLCs, and C-corporations.

Compliance Calendar for California Business Owners

• April 15: Q1 federal estimated tax; Q1 California estimated tax (30%)
• May 15: Nonprofit Form 990 deadline
• June 15: Q2 federal estimated tax; Q2 California estimated tax (40%); PTE prepayment; LLC estimated fee
• September 15: Q3 federal estimated tax; Extended S-corp and partnership return deadline; California: No Q3 estimated payment due
• October 15: Extended individual and C-corp return deadline
• January 15, 2027: Q4 federal estimated tax; Q4 California estimated tax (30%)

Plan Now, Save Later

National Small Business Week is the perfect reminder that tax planning isn’t a December-only activity. The businesses that pay the least in taxes — legally — are the ones that plan throughout the year, making strategic decisions about depreciation, retirement contributions, entity structure, and estimated payments as conditions change.

At The Law Office of Pietro Canestrelli, we help small business owners across Temecula, San Diego, Riverside, San Bernardino, and throughout California build tax strategies that work for their specific situation. From entity formation to audit defense, our team understands the unique challenges facing California businesses.

Ready to build a tax strategy for your business? Contact our office to schedule a business tax planning consultation.

100% Bonus Depreciation Is Back: What California Business Owners Need to Know

If you run a business and purchase equipment, vehicles, machinery, or make certain building improvements, the return of 100% bonus depreciation under the One Big Beautiful Bill Act (OBBBA) is one of the most impactful tax developments of 2026. After declining from 100% to 80% (2023), 60% (2024), and 40% (2025), full first-year expensing is permanently restored — retroactive to January 20, 2025.

But for California business owners, there’s a critical caveat: California does not conform. At The Law Office of Pietro Canestrelli, we help business owners across Temecula, San Diego, Riverside, San Bernardino, and all of California navigate this federal-state divide and build depreciation strategies that minimize total taxes.

What Is Bonus Depreciation?

Bonus depreciation under IRC Section 168(k) allows businesses to deduct a percentage of the cost of qualifying assets in the first year the asset is placed in service — instead of depreciating the cost over the asset’s useful life (typically 5 to 39 years depending on the asset type).

At 100%, the entire cost is deducted in year one. For a business purchasing $500,000 in equipment, that’s a $500,000 deduction — which at a 37% marginal rate produces $185,000 in first-year federal tax savings.

What Qualifies for 100% Bonus Depreciation?

Qualifying property includes:

• Tangible personal property with a recovery period of 20 years or less: Equipment, machinery, computers, furniture, vehicles, tools
• Qualified improvement property (QIP): Interior improvements to non-residential buildings (excluding enlargements, elevators/escalators, and internal structural framework)
• Certain used property: Unlike the original TCJA provision, the OBBBA continues to allow bonus depreciation on used property — as long as it’s new to the taxpayer (you haven’t used it before)
• Certain film, television, and live theatrical productions

Property that does NOT qualify includes:

• Real property with a recovery period greater than 20 years (most buildings)
• Property used predominantly outside the United States
• Property acquired from a related party
• Property required to be depreciated using the Alternative Depreciation System (ADS)

The Vehicle Depreciation Rules

Business vehicles are subject to annual depreciation limits (the “luxury auto” caps) regardless of bonus depreciation. For 2026, the first-year cap for passenger automobiles is approximately $20,400 with bonus depreciation ($12,400 without). However, vehicles over 6,000 pounds gross vehicle weight rating (GVWR) — many SUVs, pickup trucks, and vans — are not subject to the luxury auto limits and can receive full bonus depreciation.

This means a qualifying heavy SUV or truck costing $80,000 could generate an $80,000 first-year deduction on the federal return — subject to the business-use percentage requirement. If the vehicle is used 90% for business, $72,000 is deductible in year one.

California’s Nonconformity Creates a Tracking Challenge

Here’s where it gets complicated for California businesses. The state does not allow bonus depreciation under Section 168(k). California requires businesses to use the Modified Accelerated Cost Recovery System (MACRS) depreciation schedules without the bonus depreciation add-on.

The practical impact:

• On your federal return, you deduct the full cost of a qualifying asset in year one
• On your California return, you depreciate the same asset over its recovery period (5, 7, 15, or 39 years depending on asset type)
• You must maintain separate depreciation schedules for federal and California purposes
• In year one, your California taxable income will be significantly higher than your federal taxable income
• In subsequent years, California depreciation deductions will continue while no federal depreciation remains — creating a timing difference that eventually balances out

This tracking requirement is manageable with proper accounting software and professional guidance, but it adds real complexity — especially for businesses with large capital expenditures or frequent equipment turnover.

Section 179 as a California-Friendly Alternative

The Section 179 deduction offers a partial alternative to bonus depreciation that California does partially conform to. Section 179 allows businesses to deduct the full cost of qualifying assets up to an annual limit — and California follows with its own (lower) limit.

For 2026:

• Federal Section 179 limit: The OBBBA expanded this amount — consult with a tax professional for the current year’s limit as it adjusts annually for inflation
• California Section 179 limit: Historically much lower — California has capped its Section 179 deduction at $25,000 in recent years, with a phase-out beginning at $200,000 of asset purchases

For California businesses, the strategy often involves claiming Section 179 up to the California limit (getting both federal and state benefit), then using bonus depreciation for the remaining cost (federal benefit only, with a state depreciation schedule running in parallel).

Strategic Timing of Capital Purchases

With 100% bonus depreciation now permanent, the urgency to “buy before year-end” has diminished somewhat — you’ll get full first-year deduction whenever you purchase during the year. However, timing still matters for:

• Estimated tax calculations: A large mid-year equipment purchase can reduce your Q3 and Q4 estimated tax payments, freeing up cash flow
• California estimated taxes: Since California depreciation is spread over multiple years, the state tax benefit is smaller in year one — plan your California estimated payments accordingly
• Income management: If you’re near a threshold (QBI phase-out, SALT cap phase-down, or OBBBA deduction phase-outs), timing a capital purchase to maximize the deduction in a specific year can have cascading benefits

Common Mistakes to Avoid

• Assuming California follows federal: The #1 error. Do not apply the same depreciation amount on your California return that you claimed federally.
• Ignoring business-use percentage: Bonus depreciation applies only to the business-use portion of an asset. A vehicle used 60% for business and 40% personal only gets bonus depreciation on 60% of the cost.
• Forgetting listed property rules: Certain assets (computers, vehicles, entertainment equipment) are “listed property” subject to additional substantiation requirements. Maintain contemporaneous records of business use.
• Not coordinating with Section 179: The interaction between Section 179 and bonus depreciation is complex. In most cases, you should claim Section 179 first (to get the California benefit), then apply bonus depreciation to the remainder.

Build a Depreciation Strategy for Your Business

At The Law Office of Pietro Canestrelli, we work with business owners across Temecula, San Diego, Riverside, San Bernardino, and all of California to develop depreciation strategies that maximize both federal and state tax benefits. Whether you’re planning a major equipment purchase, evaluating a vehicle acquisition, or making building improvements, we’ll model the federal-state impact and help you make an informed decision.

Planning a significant capital purchase? Contact our office before you buy. Proper planning can save thousands in taxes across both your federal and California returns.

S-Corp vs. LLC vs. C-Corp in 2026: Choosing the Right Entity After the Big Beautiful Bill

If you’re starting a business in California — or operating one that’s outgrown its current structure — the entity you choose determines how you’re taxed, how you’re protected, and how much of your income you keep. In 2026, the One Big Beautiful Bill Act (OBBBA) has shifted the calculus in meaningful ways: the QBI deduction is permanent, bonus depreciation is back at 100%, and the California PTE elective tax extends through 2030.

At The Law Office of Pietro Canestrelli, we help business owners across Temecula, San Diego, Riverside, San Bernardino, and throughout California choose and structure the right entity for their goals. Here’s a side-by-side comparison under the 2026 rules.

Sole Proprietorship: Simple but Expensive

A sole proprietorship is the default structure when you start a business without forming a separate entity. It requires no formation filings (beyond local business licenses) and you report income directly on Schedule C of your personal return.

Advantages in 2026:

• No formation or annual franchise tax costs (no California $800 minimum)
• QBI deduction available (20% of qualified business income)
• Simple record-keeping and filing

Disadvantages in 2026:

• Self-employment tax on all net income (15.3% up to the Social Security wage base, 2.9% above)
• No PTE elective tax election — can’t bypass the SALT cap at the entity level
• No liability protection — personal assets are exposed to business debts and lawsuits
• No ability to split income between salary and distributions

A sole proprietorship works for side businesses with modest income and low risk. Once net income consistently exceeds $40,000-$60,000, the self-employment tax savings from an S-corp election often justify the added complexity.

LLC (Taxed as Partnership or Disregarded Entity)

A Limited Liability Company is the most popular entity type in California, offering liability protection with pass-through taxation. A single-member LLC is treated as a disregarded entity (taxed like a sole proprietorship) unless it elects otherwise. A multi-member LLC is taxed as a partnership.

Advantages in 2026:

• Liability protection — personal assets are generally shielded from business debts
• QBI deduction available
• Multi-member LLCs can elect PTE elective tax (9.3%) to bypass the SALT cap
• Flexible ownership and profit allocation
• Can elect to be taxed as an S-corp (Form 2553) to access compensation splitting

Disadvantages in 2026:

• California’s $800 annual minimum franchise tax applies even to LLCs with no income (waived for first year only)
• California’s gross receipts fee adds $900 to $11,790 annually for LLCs with income over $250,000
• Single-member LLCs cannot elect PTE tax — only multi-member LLCs qualify
• Active members pay self-employment tax on their share of income (unless S-corp election is made)

S-Corporation

An S-Corporation is a tax election (not a separate entity type) that allows pass-through taxation while enabling the owner to split income between salary (subject to payroll taxes) and distributions (not subject to payroll taxes). In 2026, this is often the most tax-efficient structure for active business owners in California.

Advantages in 2026:

• Income splitting between salary and distributions can save $5,000-$20,000+ annually in self-employment/payroll taxes
• QBI deduction available on the distribution portion (above-the-line, 20%)
• PTE elective tax available — deduct California state taxes at the entity level with no SALT cap
• Permanent QBI deduction + PTE election + reasonable compensation = the most powerful combination for California business owners earning $100,000+
• 100% bonus depreciation on federal return (though not on California return)

Disadvantages in 2026:

• Reasonable compensation requirement — the IRS requires S-corp owner-employees to pay themselves a reasonable salary. Paying too little triggers penalties and reclassification.
• California’s 1.5% S-corp franchise tax (minimum $800)
• More administrative overhead — separate payroll, quarterly payroll tax filings, separate corporate return (Form 1120-S / Form 100S)
• Restrictions on ownership (max 100 shareholders, one class of stock, no foreign shareholders)

C-Corporation

A C-Corporation is taxed at the entity level at a flat 21% federal rate. Profits distributed to shareholders as dividends are taxed again at the individual level (currently 0%, 15%, or 20% depending on income). This “double taxation” is the traditional drawback of C-corps — but in certain situations, the 21% flat rate is an advantage.

Advantages in 2026:

• Flat 21% federal rate — lower than the top individual rate of 37%
• Retained earnings are taxed at 21%, making C-corps efficient for businesses that reinvest profits rather than distribute them
• No QBI deduction limitations (the QBI deduction doesn’t apply to C-corps, but the flat rate often produces a lower effective rate anyway)
• 100% bonus depreciation on federal return
• More flexible for outside investment, multiple stock classes, and foreign ownership

Disadvantages in 2026:

• Double taxation on distributed earnings — dividends are not deductible by the corporation and are taxable to the shareholder
• California’s 8.84% corporate tax rate on top of the 21% federal rate
• No PTE elective tax — the SALT workaround doesn’t apply
• Losses don’t pass through to shareholders’ personal returns
• More complex compliance and governance requirements

Side-by-Side Comparison: Tax Impact on $250,000 Net Business Income

Here’s a simplified comparison for a California-based single business owner earning $250,000 in net business income (joint filer, no other income):

• Sole Proprietor: ~$36,200 federal income tax + ~$30,600 SE tax + ~$18,500 CA tax = ~$85,300 total
• LLC (partnership, 2 members, 50/50): Similar to sole proprietor per member, but PTE election available → ~$79,000 total after PTE savings
• S-Corp ($100K salary, $150K distribution): ~$33,500 federal income tax + ~$15,300 payroll taxes + ~$17,000 CA tax (with PTE) = ~$65,800 total
• C-Corp (retaining all earnings): ~$52,500 federal corporate tax + ~$22,100 CA corporate tax = ~$74,600 (but double taxation applies on distributions)

These are simplified estimates. Actual results vary significantly based on individual circumstances, deductions, credits, filing status, and how income is ultimately used.

When to Restructure

Common triggers for reconsidering your entity structure include:

• Net business income consistently exceeding $60,000-$80,000 (S-corp election often makes sense)
• Adding a partner or investor (may require restructuring from sole proprietorship)
• SALT cap concerns at high income levels (PTE election requires multi-member LLC or S-corp)
• Planning to sell the business (asset vs. stock sale considerations differ by entity)
• Regulatory changes — the OBBBA’s permanent provisions remove the urgency of sun-setting deductions but create long-term planning opportunities

Read our detailed guides on business formation for startups, formation and quarterly taxes, and buying or selling a small business for additional context.

Let Us Help You Choose the Right Structure

Entity selection is one of the highest-leverage tax decisions a business owner makes — and the OBBBA has changed the math for 2026 and beyond. At The Law Office of Pietro Canestrelli, we help business owners across Temecula, San Diego, Riverside, San Bernardino, and throughout California evaluate their options, model the tax impact, and implement the structure that minimizes taxes while supporting their business goals.

Time to evaluate your entity structure? Contact our office to schedule a business formation and tax planning consultation.

Should You File a Tax Extension in 2026? What California Taxpayers Need to Know

The April 15 tax deadline is approaching, and if you’re not ready to file, you’re not alone. Roughly 19 million Americans file tax extensions every year and in 2026, with the sweeping changes introduced by the One Big Beautiful Bill Act, new forms like Schedule 1-A, and California’s refusal to conform to most federal changes, there are more legitimate reasons than ever to take extra time.

But filing an extension isn’t as simple as “I’ll deal with it later.” There are rules, risks, and strategies you need to understand. At The Law Office of Pietro Canestrelli, we help taxpayers across Temecula, San Diego, Riverside, San Bernardino, and all of California navigate extension decisions every spring. Here’s what you need to know.

What Does a Tax Extension Actually Do?

A tax extension gives you additional time to file your return — it does not give you additional time to pay your taxes. This distinction is critical and trips up thousands of taxpayers every year.

When you file IRS Form 4868, you receive an automatic six-month extension to file your federal return, moving your deadline from April 15 to October 15, 2026. No explanation or justification is required — the extension is granted automatically as long as you submit the form (or make a qualifying electronic payment) by the original deadline.

However, any tax you owe is still due on April 15. If you don’t pay at least 90% of your liability by the original deadline, the IRS will assess:

• Failure-to-pay penalty: 0.5% of the unpaid balance per month, up to 25%
• Interest: Currently accruing at the federal short-term rate plus 3%, compounding daily

The failure-to-pay penalty is significantly less punishing than the failure-to-file penalty (5% per month, up to 25%), which is why filing an extension — even if you can’t pay in full — is almost always the right move.

California Extensions: You May Not Need to File Anything

Here’s something many California taxpayers don’t realize: California grants an automatic six-month extension to file without requiring a separate form. You do not need to submit FTB Form 3519 to get the extension — it’s automatic.

However, just like at the federal level, the extension is only for filing, not for payment. If you owe California taxes, you must still pay by April 15 to avoid penalties and interest from the Franchise Tax Board.

If you need to make an estimated payment with your extension, you can use FTB Form 3519 to submit a payment, but the extension itself doesn’t depend on filing the form.

When Filing an Extension Makes Strategic Sense

An extension isn’t just a procrastination tool — it can be a smart tax planning strategy in several situations:

You Need Time to Understand the New OBBBA Deductions

The 2026 filing season introduced Schedule 1-A and four new deductions (tips, overtime, auto loan interest, senior deduction) that many tax preparers are still learning. If you qualify for any of these deductions and want to make sure they’re claimed correctly — including understanding that California does not recognize them on your state return — an extension gives you time to get it right.

You’re Waiting for K-1s or Other Partnership/Trust Documents

If you’re a partner in a business, a beneficiary of a trust, or a shareholder in an S-corporation, you depend on K-1 forms that are often issued late. Partnership and S-corp returns are due March 15, and extensions push them to September 15 — which means your K-1 may not arrive until the fall. Filing a personal extension is necessary to accommodate this reality.

You Had a Significant Life Event

Marriage, divorce, death of a spouse, sale of a home or business, major investment gains or losses — any of these can make your return substantially more complex. In 2026, these events interact with new OBBBA provisions (like the expanded SALT deduction and permanent estate tax exemption) in ways that require careful analysis.

You Have Cryptocurrency Transactions

The first year of Form 1099-DA reporting has been bumpy. Some exchanges delayed issuing forms until mid-March, cost basis data is frequently incomplete for transferred assets, and reconciling on-chain activity with exchange-reported figures is time-consuming. An extension gives you time to accurately report your crypto transactions rather than rushing and triggering IRS matching discrepancies.

You Have Unfiled Returns from Prior Years

If you haven’t filed returns for one or more prior years, it may be strategically wise to file the delinquent returns before or simultaneously with your current year return. An extension gives your tax attorney time to coordinate the filings, assess any exposure from unfiled taxes, and develop a resolution strategy.

When an Extension Is Risky

Extensions aren’t always the best strategy. Be cautious if:

• You owe a significant balance and can’t pay: Interest and penalties accrue from April 15 regardless. The longer you wait to file (and arrange payment), the more your debt grows. If you owe and can’t pay, it’s usually better to file on time and immediately explore tax relief options like an installment agreement or offer in compromise.
• You’re due a refund but file for unnecessary extensions: There’s no penalty for filing late when you’re owed a refund, but there’s also no reason to delay. File your return and claim your money.
• You’re already behind on compliance: If you have existing IRS issues — unfiled returns, an active installment agreement, or a pending collection matter — an extension can sometimes signal non-compliance to the IRS. Discuss the optics with a qualified representative before extending.

FTB Extension Warning: California Audits Extension Filers More Aggressively

Here’s a data point that’s worth understanding: according to published enforcement statistics, California taxpayers who file on extension are approximately 2.3 times more likely to be audited by the FTB than those who file by the original deadline. This doesn’t mean you shouldn’t file an extension when you need one — but it does mean your extended return should be accurate, well-documented, and consistent with all reported third-party information.

If you have a complex California return — especially one involving business income, rental properties, remote work across state lines, or significant deductions — working with a tax professional who understands FTB audit defense is well worth the investment.

How to File a Federal Tax Extension

Filing a federal extension is straightforward:

• IRS Form 4868: File electronically through most tax software, or mail a paper form to the IRS by April 15
• Electronic payment: Making an electronic tax payment through IRS Direct Pay or EFTPS by April 15 automatically counts as filing an extension — no Form 4868 required
• Estimated payment: If you owe, include your best estimate of the balance due with your extension to minimize penalties and interest

Remember, no approval letter is sent. If you file the form correctly by the deadline, your extension is automatically granted.

Important Dates if You File an Extension

• April 15, 2026: Original filing deadline; last day to file Form 4868; last day to pay estimated tax owed; deadline for IRA contributions and HSA contributions for tax year 2025; FBAR filing deadline (auto-extends to October 15 if not filed by this date)
• June 15, 2026: Q2 estimated tax payment due (California requires 40% of annual estimated liability); California LLC estimated fee deadline
• October 15, 2026: Extended filing deadline for individual returns; FBAR extended deadline; last day to file extended corporate returns (calendar-year C-corps)

Need Help Deciding? We’re Here to Help.

Whether you should file an extension depends on your specific circumstances — your income complexity, your compliance history, your outstanding liabilities, and the new deductions and forms introduced by the OBBBA. At The Law Office of Pietro Canestrelli, we serve taxpayers throughout Temecula, San Diego, Riverside, San Bernardino, and across California and the United States.

If you’re facing an April 15 deadline and aren’t sure what to do, contact our office for guidance. We’ll help you make the right strategic decision, not just the easy one.

Financial Literacy Month: 7 Tax Concepts Every Californian Should Master in 2026

April is Financial Literacy Month — and there has never been a year where understanding your taxes mattered more. The One Big Beautiful Bill Act (OBBBA), signed into law in mid-2025, is the largest overhaul of the federal tax code since the Tax Cuts and Jobs Act of 2017. New deductions, new forms, new thresholds, and an entirely new relationship between federal and California state taxes are affecting every taxpayer from San Diego to Sacramento.

At The Law Office of Pietro Canestrelli, we believe that informed taxpayers make better decisions — and better decisions lead to lower tax bills, fewer penalties, and far fewer encounters with the IRS. Whether you live in Temecula, Riverside, San Bernardino, or anywhere in California, here are seven tax concepts you need to understand in 2026.

1. California Does Not Conform to Most New Federal Tax Deductions

This is the single most important tax fact for Californians in 2026 — and the one most likely to cause confusion, errors, and unexpected tax bills.

When the OBBBA introduced new federal deductions for tips, overtime pay, auto loan interest, and an enhanced senior standard deduction, California deliberately chose not to adopt them. SB 711, enacted in October 2025, set the state’s Internal Revenue Code conformity date to January 1, 2025 — intentionally excluding the OBBBA provisions signed July 4, 2025.

What does this mean practically? If you’re a server in San Diego claiming the new no-tax-on-tips deduction on your federal return, that income is still fully taxable on your California return. If you’re a nurse in Riverside claiming the overtime deduction federally, California doesn’t recognize it. This creates a growing gap between your federal adjusted gross income and your California adjusted gross income — and if you’re not tracking both, you’re likely to underpay your state taxes.

This federal-state divergence affects income tax calculations for millions of Californians and is something every taxpayer — and every tax preparer — needs to understand clearly.

2. The SALT Deduction Cap Increased to $40,000 — But There’s a Phase-Out

For years, the $10,000 cap on State and Local Tax (SALT) deductions hit California taxpayers harder than almost anyone in the country. With state income tax rates up to 13.3% and some of the nation’s highest property taxes, many Californians were leaving thousands of dollars in deductions on the table.

The OBBBA raised the SALT cap to $40,000 — a meaningful improvement. But it’s not unlimited, and there are important details:

• The $40,000 cap applies to taxpayers with modified adjusted gross income (MAGI) under $500,000 (joint filers)
• Above $500,000 MAGI, the cap phases down by 30% of the excess — meaning high-income earners may get less benefit than they expect
• Even with the higher cap, many high-income Californians still pay more in state and local taxes than they can deduct

For business owners, the California Pass-Through Entity (PTE) elective tax remains one of the most powerful tools to work around the SALT cap entirely. The PTE tax (at 9.3%) is deductible at the entity level with no cap, and it’s been extended through 2030. Learn more about how the SALT changes affect you in our complete SALT deduction guide.

3. Estimated Taxes in California Follow a Different Schedule Than Federal

If you’re self-employed, a freelancer, a business owner, or anyone who pays estimated taxes, California’s payment schedule can trip you up. While the federal government splits quarterly payments evenly at 25% each quarter, California uses a 30/40/0/30 split:

• Q1 (April 15): 30% of your annual estimated liability
• Q2 (June 15): 40% of your annual estimated liability
• Q3 (September 15): 0% — no payment due
• Q4 (January 15): 30% of your remaining liability

The June 15 payment is the biggest single installment of the year. Taxpayers who follow the federal schedule and pay 25% each quarter unknowingly trigger California underpayment penalties — and the Franchise Tax Board assesses those penalties automatically.

If you’ve received an FTB penalty notice for estimated tax underpayment, our team can help you evaluate whether penalty abatement or a payment arrangement is available. Contact us to discuss your situation.

4. The New Schedule 1-A Is How You Claim OBBBA Deductions

The OBBBA introduced several new “above the line” deductions — meaning they reduce your adjusted gross income regardless of whether you itemize. But these deductions aren’t claimed on the standard Form 1040. Instead, they require a brand-new form: Schedule 1-A (Additional Deductions).

Schedule 1-A covers:

• No-tax-on-tips: Up to $25,000 per year for workers in 68 qualifying tipped occupations
• No-tax-on-overtime: Up to $12,500 ($25,000 joint) for FLSA-qualifying overtime pay
• Auto loan interest: Up to $10,000 in interest on loans for new U.S.-assembled vehicles
• Enhanced senior deduction: $6,000 ($12,000 joint) for taxpayers 65 and older

All four deductions have income phase-outs, generally beginning between $150,000 and $160,000 for single filers and $300,000 to $320,000 for joint filers. And remember: none of these deductions apply to your California state return.

If you filed your 2025 return before understanding these new deductions, you may benefit from an amended return. Our guide on tax amendments explains the process.

5. The IRS Is Using AI to Select Returns for Audit

The IRS now operates over 125 artificial intelligence and machine learning models to identify returns for examination, verify identities, detect fraud, and prioritize collections. Despite significant workforce reductions, the agency’s technology-driven enforcement capacity has actually increased.

AI-driven audit selection means the IRS can now:

• Cross-reference your return against third-party data (W-2s, 1099s, and the new 1099-DA for cryptocurrency) in near real-time
• Identify statistical anomalies in deductions, credits, and income reporting at scale
• Score returns using the Discriminant Information Function (DIF) system, which has been enhanced with machine learning capabilities
• Focus enforcement resources on high-income individuals (those earning over $400,000) and complex partnerships

This doesn’t mean you should be afraid to claim legitimate deductions — but it does mean accuracy and documentation are more important than ever. If you’re concerned about audit risk, our audit avoidance guide and IRS audit defense page explain how to protect yourself. You can also read about the IRS’s expanding use of AI in our article on IRS AI enforcement.

6. Cryptocurrency Is Now Reported to the IRS by Your Exchange

For years, crypto investors operated in a gray area when it came to tax reporting. That era is definitively over. Starting with tax year 2025, custodial crypto brokers — Coinbase, Kraken, Gemini, and others — are issuing Form 1099-DA to both the IRS and to taxpayers, reporting gross proceeds from digital asset sales and exchanges.

Key things to know:

• Cost basis reporting becomes mandatory for assets acquired on or after January 1, 2026
• For assets acquired before that date, or transferred between wallets, cost basis may be missing or reported as zero — which could dramatically overstate your taxable gains
• The IRS automated matching system will compare your 1099-DA data to your return, and discrepancies trigger CP2000 notices
• DeFi protocols and non-custodial wallets are not yet subject to 1099-DA reporting, but that doesn’t mean the income isn’t taxable

If you have cryptocurrency holdings and haven’t been reporting them properly, the cost of voluntary compliance is almost always lower than the cost of an IRS enforcement action. Read our detailed 2026 crypto tax reporting guide or our broader crypto tax guidance for more information.

7. You Have More Tax Debt Resolution Options Than You Think

One of the biggest financial literacy gaps we see — especially among taxpayers in Temecula, San Diego, Riverside, and San Bernardino — is the belief that if you owe the IRS, your only option is to pay in full immediately. That’s simply not true.

The IRS offers multiple formal programs for taxpayers who can’t pay their full liability:

• Installment Agreements: Monthly payment plans available for debts of virtually any size. Streamlined agreements (no detailed financial disclosure required) are available for debts under $50,000.
• Offer in Compromise (OIC): A settlement that allows you to resolve your tax debt for less than the full amount owed. The IRS accepted approximately 31% of OIC applications in recent years. See our OIC overview and acceptance guide.
• Currently Not Collectible (CNC) Status: If paying your tax debt would create a genuine financial hardship, the IRS can temporarily suspend all collection activity. Your debt remains on the books, but the 10-year collection statute continues to run.
• Penalty Abatement: The IRS’s First-Time Abatement program can eliminate failure-to-file and failure-to-pay penalties for taxpayers with a clean compliance history. Reasonable Cause abatement is available for those who can demonstrate circumstances beyond their control.

The California Franchise Tax Board also offers installment agreements and, in limited circumstances, its own settlement program. The EDD and CDTFA have their own resolution procedures as well.

The key is acting early. The more time you have, the more options are available — and the better the outcome. Learn more about your options on our tax debt resolution page.

Take Control of Your Tax Future This Financial Literacy Month

Financial literacy isn’t just about budgeting and saving — it’s about understanding the rules that govern how much of your income you keep, how the government can enforce collections, and what rights and options you have when things go wrong. In 2026, with the OBBBA reshaping federal taxes and California charting its own path, the stakes are higher than they’ve been in years.

At The Law Office of Pietro Canestrelli, we serve clients across Temecula, San Diego, Riverside, San Bernardino, throughout Southern California, and nationwide. Whether you need help understanding how the new tax laws affect your situation, resolving a tax debt, or defending against an IRS audit, our team of experienced tax attorneys is here to help.

Have questions about how these changes affect you? Contact our office to schedule a consultation. Your financial literacy starts with a conversation.

Download Our Salt Cap eBook Today

If you’re a California taxpayer, you’ve probably heard the buzz about the new $40,000 SALT deduction cap. Since the One Big Beautiful Bill Act was signed into law on July 4, 2025, taxpayers across the country have been scrambling to understand what this historic change means for their wallets. Whether you own a home in Temecula, run a business in San Diego, or earn a living anywhere in Riverside, San Bernardino, or Southern California, the new SALT cap could mean thousands of dollars in potential tax savings—or no change at all, depending on your circumstances.

That’s exactly why The Law Office of Pietro Canestrelli, A.P.C. created a brand-new, free eBook: The $40,000 SALT Cap: What Every American Taxpayer Needs to Know. This comprehensive guide breaks down everything from the basics of the SALT deduction to advanced strategies that could help you keep more of your hard-earned money. In this article, we’ll walk you through what you’ll find inside the eBook, why it matters, and how to get your free copy.

What Is the SALT Deduction—and Why Did the Cap Change?

SALT stands for State and Local Taxes—the income, property, and sales taxes you pay to your city, county, or state. For decades, federal law allowed taxpayers who itemized their deductions to subtract these payments from their federal taxable income, dollar for dollar. This was a major benefit for residents of high-tax states like California, where combined state income tax and property tax bills routinely exceed $20,000 or $30,000 per year.

In 2018, the Tax Cuts and Jobs Act (TCJA) capped the SALT deduction at just $10,000—a dramatic reduction that hit California homeowners and high earners especially hard. Families in places like Temecula, San Diego, and throughout the Inland Empire suddenly faced higher federal tax bills because they could no longer deduct the full amount of their state and local tax payments.

Now, that cap has quadrupled. Under the new law, the SALT deduction limit rises to $40,000 for the 2025 tax year (the return you’ll file in 2026), with a 1% annual increase through 2029. For 2026, that means the cap will be $40,400. However, the expansion is temporary—the cap is scheduled to revert to $10,000 in 2030 unless Congress takes further action. If you’d like a deeper look at how the new SALT rules interact with the 2026 filing season, our article on critical dates and new rules for California taxpayers is a great starting point.

What’s Inside the Free SALT Cap eBook?

Our new eBook is designed for everyday taxpayers—not just accountants or attorneys. Across 10 chapters and 17 professionally designed pages, the guide covers every angle of the SALT deduction in plain, accessible language. Here’s a preview of what you’ll find:

Chapter 1: Why the SALT Cap Suddenly Matters

The eBook opens with a clear explanation of why this topic deserves your attention right now. With the cap rising from $10,000 to $40,000, the potential impact on your federal tax bill is significant. The chapter frames the conversation around the real-world choices taxpayers face—where to live, whether to buy or rent, and how to structure finances for maximum efficiency.

Chapter 2: SALT—Not Just for the Dinner Table

Before diving into strategy, the eBook ensures you understand the fundamentals. This chapter explains what counts as a state and local tax, how the deduction works on your federal return, and why it has historically been so valuable for residents in high-tax jurisdictions like California. For a more detailed look at how property taxes interact with your SALT deduction, you can also read our guide on mortgage interest and property tax deductions.

Chapter 3: The Old SALT Cap—$10,000’s Ripple Effect

Understanding the impact of the old $10,000 cap helps put the new rules in perspective. The eBook explores how the original cap changed homebuying decisions, created tension between state and federal governments, and pressured local budgets. For California families, this chapter hits close to home—it explains why so many taxpayers in San Diego County, Riverside County, and San Bernardino County felt the sting.

Chapter 4: Meet the $40,000 Cap—What Changed, and Why?

Here’s where the eBook gets into the details of the new law. You’ll learn about income limits and phaseouts (the full benefit phases out for filers with modified adjusted gross income above $500,000), the potential “marriage penalty,” and the temporary nature of the increase. This chapter emphasizes why it’s critical to understand eligibility requirements rather than assuming the higher cap automatically applies to you. For a detailed eligibility breakdown, check out our article on who qualifies for the $40,000 SALT cap.

Chapter 5: Who Actually Benefits (and Who Doesn’t)

Not everyone comes out ahead under the new rules. The eBook identifies four categories of taxpayers—big winners, those who’ll see minimal impact, middle-ground households, and those facing potential downsides. If you’re a homeowner in a high-tax California zip code paying $25,000 or more in combined state income and property taxes, you’re likely in the “big winner” column. But renters, residents of no-income-tax states, and retirees on Social Security may see little change.

Chapter 6: State-by-State Impact

The SALT cap doesn’t affect every state equally. California, New York, New Jersey, Connecticut, and Illinois residents stand to gain the most, while residents of lower-tax states like Florida, Texas, and Nevada may barely notice. The eBook also highlights special state-level workarounds that some jurisdictions have adopted. California, for instance, recently extended its pass-through entity tax (PTET) program for an additional five years—a strategy that remains available even under the new federal rules. Our article on how new California tax laws affect small businesses covers this in more detail.

Chapter 7: Loopholes, Workarounds, and the IRS Watchlist

This chapter explores the strategies taxpayers and state governments have used to work around the SALT cap—and which ones the IRS has flagged. From pass-through entity taxes to charitable contribution workarounds to payment timing strategies, the eBook separates what’s legitimate from what’s risky. The takeaway? Tax planning is smart, but pushing the boundaries without professional guidance can be costly.

Chapter 8: Mythbusting—Common SALT Cap Misconceptions

There’s no shortage of misinformation floating around about the SALT deduction. The eBook tackles five of the most common myths, including the belief that only the wealthy are affected, that married couples automatically get double the cap, and that the $40,000 limit is permanent. Spoiler: none of those are true.

Chapter 9: Tips, Tricks, and Strategic Moves for Taxpayers

This is the actionable chapter. The eBook walks through six practical strategies you can use to maximize your SALT deduction, including bunching deductions across tax years, tracking every deductible tax payment, exploring business entity options for pass-through taxation, staying organized for audit readiness, filing early, and working with a qualified tax professional.

Chapter 10: Taking Action—Next Steps and How We Can Help

The final chapter ties it all together with a clear action plan: calculate your benefit, check your withholding, stay informed about legislative changes, and schedule a strategy session with a tax attorney who understands both state and federal rules. Our team at The Law Office of Pietro Canestrelli has guided clients through every version of the SALT cap—and we’re ready to help you navigate this one.

Why This eBook Is Especially Important for California Taxpayers

California has one of the highest state income tax rates in the country, with a top marginal rate of 13.3%. Combine that with property taxes in desirable communities across Temecula, Murrieta, San Diego, Riverside, and San Bernardino, and it’s easy to see how a California household can accumulate $30,000 or more in state and local tax payments each year.

Under the old $10,000 cap, a huge portion of those payments was simply lost—no federal deduction available beyond the first $10,000. With the new $40,000 cap, many California families can now deduct three or even four times what they could before, potentially saving thousands of dollars on their federal return.

But the details matter. The phaseout rules mean that households with modified adjusted gross income above $500,000 start losing the benefit, and it disappears entirely once income exceeds $600,000. The cap also applies per tax return, not per person, which creates a potential marriage penalty for dual-income couples. And because the increase is temporary—reverting to $10,000 in 2030—there’s a limited window to take full advantage.

Our eBook explains all of this in clear, practical terms, with examples that reflect real California tax situations. For an even deeper dive into how the expanded SALT cap affects California homeowners specifically, we recommend our comprehensive article: The $40,000 SALT Deduction: How California Homeowners Can Finally Benefit.

Key Takeaways from the eBook

While the full guide covers far more ground, here are a few of the most important points every taxpayer should understand:

The SALT deduction cap quadrupled. Beginning with the 2025 tax year, you can deduct up to $40,000 in state and local taxes on your federal return, up from the previous $10,000 limit. For 2026, the cap rises to $40,400 and continues increasing by 1% annually through 2029.

You must itemize to benefit. The SALT deduction is only available if you choose to itemize your deductions rather than taking the standard deduction. With the 2025 standard deduction at $15,000 for single filers and $30,000 for married couples filing jointly, you’ll want to add up all your itemized deductions—including SALT—to see which approach saves you more.

Income phaseouts apply. The full $40,000 cap is available to taxpayers with modified AGI of $500,000 or less ($250,000 for married filing separately). Above that threshold, the cap reduces by 30 cents for every dollar over the limit, with a floor of $10,000.

The increase is temporary. Unless Congress acts, the SALT cap reverts to $10,000 starting in 2030. That gives taxpayers a five-year window (2025–2029) to maximize this benefit.

State workarounds still matter. California’s pass-through entity tax program, which allows S-corp and partnership owners to pay state taxes at the entity level, remains a valuable strategy even with the higher federal cap. Business owners should evaluate whether the PTET election provides additional savings on top of the expanded SALT deduction.

Who Should Download the eBook?

This guide is designed for a wide audience, but you’ll find it especially valuable if you fall into one or more of these categories:

California homeowners paying significant property taxes, particularly in high-cost areas like San Diego, Temecula, Murrieta, Riverside, and the broader Southern California region.

High-income professionals and dual-income households whose combined state income tax and property tax payments exceed $10,000 per year.

Small business owners operating as S-corporations, partnerships, or LLCs who want to understand how the SALT cap interacts with California’s PTET program and other business tax strategies.

Homebuyers and sellers who are factoring tax implications into their real estate decisions. If you’re considering buying or selling property, our guide on taxes on home sales pairs well with the eBook for a complete picture.

Anyone navigating an IRS issue who wants to understand how the SALT cap fits into the broader landscape of federal tax planning and IRS relief options.

How to Get Your Free Copy

Downloading the eBook is easy. Visit our website at ietaxattorney.com to access The $40,000 SALT Cap: What Every American Taxpayer Needs to Know at no cost. You can also subscribe to our newsletter for ongoing tax tips and updates as the rules continue to evolve, or visit our YouTube channel for video breakdowns of the latest tax developments.

Schedule a SALT Strategy Session

Reading the eBook is a great first step—but every taxpayer’s situation is different. The interaction between your income level, filing status, property taxes, state income taxes, business structure, and other deductions creates a unique tax picture that deserves individualized analysis.

At The Law Office of Pietro Canestrelli, A.P.C., our team combines insider knowledge—founded by a former IRS Attorney of the Office of Chief Counsel in Washington, D.C. and California Board Certified Tax Specialist—with a deep understanding of both federal and California state tax rules. Whether you need help calculating your potential SALT savings, restructuring your tax payments for maximum benefit, exploring pass-through entity strategies, or resolving an existing tax issue, we’re here to help.

We serve clients from our offices in Temecula and San Diego, and offer virtual consultations for clients throughout California and nationwide.

Ready to see how the new $40,000 SALT cap affects your tax situation? Call us at (951) 535-4241, email info@ietaxattorney.com, or book a free consultation online today.

Frequently Asked Questions About the SALT Cap eBook

What is the SALT deduction cap for 2026?

For the 2026 tax year, the SALT deduction cap is $40,400 ($20,200 for married filing separately). This reflects a 1% increase from the initial $40,000 cap established for the 2025 tax year under the One Big Beautiful Bill Act. The cap will continue increasing by 1% annually through 2029 before reverting to $10,000 in 2030.

Is the eBook free?

Yes. The $40,000 SALT Cap: What Every American Taxpayer Needs to Know is available as a free download from ietaxattorney.com. Our firm believes that every taxpayer deserves access to clear, practical information about the rules that affect their finances.

Do I need to be in California to benefit from this guide?

Not at all. While the eBook includes California-specific insights, the SALT cap is a federal rule that applies to taxpayers in every state. Residents of any high-tax state—including New York, New Jersey, Connecticut, and Illinois—will find the guide highly relevant. Even taxpayers in lower-tax states can benefit from understanding how the SALT deduction fits into their overall tax strategy.

Should I switch from the standard deduction to itemizing?

It depends on your total itemized deductions. With the higher SALT cap, some taxpayers who previously took the standard deduction may now find that itemizing saves them more. The eBook walks you through how to run the numbers, and our team can help you make the right choice during a consultation.

What if I earn more than $500,000?

If your modified adjusted gross income exceeds $500,000 ($250,000 for married filing separately), your SALT cap is reduced by 30 cents for every dollar above the threshold. The cap bottoms out at $10,000, meaning that filers with very high incomes won’t see a benefit from the expanded limit. However, pass-through entity tax strategies and other planning tools may still offer savings. Our SALT deduction planning guide covers additional strategies for higher-income taxpayers.