Student Loan Forgiveness Is Taxable Again in 2026: What Borrowers Need to Know

Starting January 1, 2026, student loan forgiveness under income-driven repayment (IDR) plans is once again taxable as federal income. The temporary exclusion provided by the American Rescue Plan Act (ARPA), which shielded all forms of student loan discharge from taxation through 2025, has expired. For borrowers on SAVE, PAYE, IBR, or ICR plans approaching forgiveness, this creates a potential “tax bomb” worth thousands — or tens of thousands — of dollars.

At The Law Office of Pietro Canestrelli, we help borrowers across Temecula, San Diego, Riverside, San Bernardino, and throughout California understand the tax consequences of student loan forgiveness and develop strategies to manage the liability.

What Changed on January 1, 2026?

Under the ARPA (enacted in 2021), all student loan forgiveness — including IDR forgiveness after 20-25 years, disability discharge, closed-school discharge, and borrower defense to repayment — was excluded from federal taxable income through December 31, 2025.

That exclusion expired. Starting in 2026:

• IDR plan forgiveness (SAVE, PAYE, IBR, ICR) after 20-25 years of payments is taxable as ordinary income
• Total and Permanent Disability (TPD) discharge is taxable unless the borrower is insolvent
• Closed-school discharge is taxable
• Borrower defense to repayment forgiveness is taxable

What remains tax-free:

• Public Service Loan Forgiveness (PSLF) — permanently excluded from taxation under IRC §108(f)(1)
• Death and disability discharge — may still qualify for exclusion under the insolvency exception
• Employer student loan assistance — up to $5,250 per year remains excludable under §127 (this provision was extended by the OBBBA)

How Big Is the “Tax Bomb”?

The size of the tax liability depends on the amount forgiven, which can be substantial. After 20-25 years of income-driven payments — during which the balance often grows due to capitalized interest — many borrowers will have forgiveness amounts significantly larger than their original loan balance.

Example: A borrower who took out $80,000 in loans, made 20 years of IDR payments totaling $60,000, but whose balance grew to $145,000 due to capitalized interest, would have $145,000 in forgiveness income in the year of discharge.

At the 22% federal bracket plus California’s marginal rate (potentially 9.3%), the combined tax bill could be approximately $45,000. For borrowers in higher brackets, the liability is even greater — because the forgiveness income is added on top of their regular income, potentially pushing them into higher brackets.

The Insolvency Exception: Your Best Defense

Under IRC §108(a)(1)(B), discharged debt (including student loan forgiveness) can be excluded from income to the extent you are insolvent at the time of the discharge. You are insolvent when your total liabilities exceed the fair market value of your total assets.

This is reported on IRS Form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness).

For many borrowers receiving IDR forgiveness, insolvency is a genuine possibility — especially if the student loans themselves constitute the majority of their liabilities. A borrower with $145,000 in student loans, $25,000 in credit card debt, and $50,000 in retirement savings and personal property has total liabilities of $170,000 and assets of $50,000 — making them insolvent by $120,000. They could exclude up to $120,000 of the forgiveness income.

Important: Retirement accounts (401(k), IRA) are generally included as assets for insolvency purposes, but certain exempt assets under state law may be excluded. California’s exemption laws can be favorable. This analysis requires professional assistance to calculate correctly.

New Repayment Plan Changes Effective July 1, 2026

The OBBBA restructured federal student loan repayment plans effective July 1, 2026. New borrowers will have access to only two repayment plans:

• Standard Repayment Plan: Fixed payments over 10 years
• Repayment Assistance Plan (RAP): The new income-driven plan replacing SAVE, PAYE, and ICR for new borrowers

Existing borrowers already enrolled in SAVE, PAYE, IBR, or ICR can generally remain on their current plans, but the transition creates uncertainty that every borrower should discuss with their loan servicer and a tax professional.

Planning Strategies for Borrowers Approaching Forgiveness

Build a “Tax Bomb Fund”

If you expect IDR forgiveness in the next 5-10 years, start setting aside money now — in a dedicated savings or investment account — to cover the estimated tax liability. Even small monthly contributions compound over time and can prevent the forgiveness year from becoming a financial crisis.

Calculate Your Insolvency Position

Determine whether you’ll be insolvent at the time of forgiveness. If so, the insolvency exception may eliminate most or all of the tax. Avoid paying down other debts aggressively in the years before forgiveness if doing so would reduce your liabilities below the insolvency threshold.

Consider Accelerating PSLF if Eligible

If you work in public service or for a qualifying nonprofit, PSLF forgiveness is tax-free with no expiration. Verifying your employment certification and payment count now — and potentially adjusting your career path to qualify — could eliminate the tax bomb entirely.

Evaluate Whether to Keep Paying After 20 Years

In some cases, the tax on forgiveness may be less than the remaining payments over additional years. In other cases, continuing to pay may be more efficient. This is a calculation that depends on your income, tax bracket, remaining balance, and insolvency position.

California’s Treatment of Student Loan Forgiveness

California generally conforms to the federal treatment of discharged debt — meaning IDR forgiveness is taxable for California purposes as well. However, California’s insolvency rules track the federal insolvency exception, so borrowers who qualify for the federal exclusion will generally qualify for the state exclusion too.

The California Franchise Tax Board processes these claims through the state return, so proper reporting on both federal and state returns is essential.

Why This Matters Now — Even If Forgiveness Is Years Away

The tax bomb isn’t a future problem to worry about later. The decisions you make now — about which repayment plan to choose, whether to pursue PSLF, how to manage your asset and liability position, and whether to build a tax reserve — will determine the size of the impact when forgiveness arrives.

For borrowers with large balances, the tax liability from forgiveness can rival a year’s salary. Planning for it requires the same seriousness as planning for any other major financial event.

Get Professional Guidance

At The Law Office of Pietro Canestrelli, we help borrowers across Temecula, San Diego, Riverside, San Bernardino, and throughout California navigate the intersection of student loan forgiveness and tax law. Whether you need help calculating your insolvency position, filing Form 982, or developing a multi-year plan to minimize the tax bomb, contact our office for a consultation.

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.

IRS Penalty Abatement: First-Time Abatement, Reasonable Cause, and How to Request Relief

IRS penalties can be devastating. A failure-to-file penalty of 5% per month, a failure-to-pay penalty of 0.5% per month, an accuracy-related penalty of 20% of the underpayment — these charges stack quickly and can add thousands or tens of thousands of dollars to your tax bill. But here’s what many taxpayers don’t know: the IRS regularly abates penalties when you qualify and make a proper request.

At The Law Office of Pietro Canestrelli, penalty abatement is one of the most common — and most impactful — services we provide for clients across Temecula, San Diego, Riverside, San Bernardino, and throughout California. In many cases, we reduce penalty assessments by 50-100%, saving our clients thousands of dollars. Here’s how the process works.

The Most Common IRS Penalties

Failure-to-File Penalty (IRC §6651(a)(1))

Assessed when you file your return after the due date (including extensions). The penalty is 5% of the unpaid tax per month, up to a maximum of 25%. For a $20,000 balance, the maximum failure-to-file penalty is $5,000.

Failure-to-Pay Penalty (IRC §6651(a)(2))

Assessed when you don’t pay your tax by the due date. The penalty is 0.5% of the unpaid balance per month, up to 25%. For a $20,000 balance, the annual failure-to-pay penalty is approximately $1,200.

Accuracy-Related Penalty (IRC §6662)

Assessed when the IRS determines you understated your tax due to negligence, disregard of rules, or a substantial understatement of income. The penalty is 20% of the underpayment. On a $50,000 understatement, that’s $10,000.

Estimated Tax Penalty (IRC §6654)

Assessed when you don’t pay enough estimated tax during the year. This penalty is calculated as interest on the underpayment for each quarter.

First-Time Abatement (FTA): The Low-Hanging Fruit

The IRS’s First-Time Abatement administrative waiver is the easiest penalty relief to obtain — and it’s chronically underutilized. Under FTA, the IRS will waive failure-to-file and failure-to-pay penalties for a single tax year if you meet three simple criteria:

• Clean compliance history: You filed all required returns and had no penalties assessed (or all penalties were abated) for the three tax years prior to the penalty year
• Current compliance: You’ve filed all currently required returns (or valid extensions)
• Payment arrangement: You’ve paid the tax due or arranged to pay through an installment agreement

That’s it. You don’t need to demonstrate reasonable cause. You don’t need to explain what happened. If you have a clean 3-year history, you’re entitled to FTA relief as a matter of IRS administrative policy (Internal Revenue Manual §20.1.1.3.6.1).

How to request FTA:

• By phone: Call the IRS at the number on your penalty notice and request First-Time Abatement. The representative can apply it immediately.
• In writing: Submit a written request citing IRM §20.1.1.3.6.1 and stating that you meet the eligibility criteria.
• Through a representative: Your tax attorney or enrolled agent can request FTA on your behalf through the Practitioner Priority Service line.

FTA can only be used for one tax year at a time. If you have penalties for multiple years, use FTA on the year with the largest penalty — then pursue Reasonable Cause for the remaining years.

Reasonable Cause Abatement: When Circumstances Were Beyond Your Control

If you don’t qualify for FTA (or you’ve already used it), you can request penalty abatement based on Reasonable Cause — circumstances beyond your control that prevented timely filing or payment.

The IRS evaluates Reasonable Cause requests based on whether the taxpayer exercised “ordinary business care and prudence” but was nonetheless unable to comply. Factors the IRS considers include:

• Death, serious illness, or incapacitation: Of the taxpayer, a family member, or the tax professional responsible for filing
• Natural disaster or casualty: Fire, flood, earthquake, or other disaster that destroyed records or displaced the taxpayer
• Inability to obtain records: Despite reasonable efforts, you couldn’t get necessary documents (K-1s, W-2s, etc.) in time to file
• Erroneous IRS advice: You relied on incorrect written or oral advice from the IRS
• Reliance on a tax professional: You gave a competent tax professional all necessary information, and they failed to file. Note: this is harder to prove than most taxpayers expect — the IRS holds the taxpayer responsible for selecting a competent preparer and following up.
• Financial hardship: You couldn’t pay due to circumstances beyond your control (job loss, unexpected expenses, economic downturn)

Writing an Effective Reasonable Cause Letter

The quality of your written Reasonable Cause request significantly affects the outcome. A strong request includes:

• A clear, specific explanation of what happened and when
• How the circumstances prevented you from filing or paying on time
• What steps you took to comply as soon as possible once the impediment was removed
• Supporting documentation (medical records, insurance claims, death certificates, correspondence with tax professionals, disaster declarations)

Generic statements like “I was going through a hard time” are insufficient. The IRS wants specifics: dates, diagnoses, names, and evidence. Our team at The Law Office of Pietro Canestrelli has extensive experience crafting penalty abatement requests that meet the IRS’s evidentiary standards. Read more about this process in our article on requesting penalty abatement.

Statutory Exceptions to Penalties

Beyond administrative relief, certain statutory provisions can eliminate penalties entirely:

• Reasonable Cause and Good Faith (§6664(c)): The accuracy-related penalty does not apply if you show reasonable cause and good faith for the position taken on your return
• Substantial Authority: If you had “substantial authority” for a tax position (a higher standard than reasonable basis but lower than “more likely than not”), the substantial understatement penalty doesn’t apply
• Adequate disclosure: If you adequately disclosed a position on your return (using Form 8275 or 8275-R), the negligence penalty doesn’t apply — even if the position is ultimately wrong
• Tax opinion letters: A qualified tax opinion letter can provide penalty protection for complex or aggressive positions

California Penalty Abatement

The California Franchise Tax Board has its own penalty abatement procedures, which differ from the IRS in important ways:

• California does not have a formal “First-Time Abatement” program equivalent to the IRS’s administrative waiver
• Reasonable Cause abatement is available, but the FTB tends to apply stricter standards
• The FTB assesses a late-filing penalty and a demand-to-file penalty — both can be abated separately
• FTB penalty abatement requests are submitted in writing to the address on the penalty notice

For taxpayers facing penalties from both the IRS and the FTB, a coordinated abatement strategy can maximize relief across both agencies. Our attorneys handle both simultaneously.

When to Hire a Professional for Penalty Abatement

Some penalty abatement requests are straightforward enough to handle on your own — particularly FTA requests for small amounts. But professional representation is strongly recommended when:

• Penalties exceed $5,000 (the savings justify the cost of representation)
• Multiple years are involved
• The Reasonable Cause argument is complex or requires documentary evidence
• The penalty is accuracy-related (§6662) and requires legal analysis of the tax position
• You’re also resolving the underlying tax liability (penalty abatement is often negotiated as part of a larger resolution)
• The initial request was denied and you need to escalate to a supervisor or file a formal appeal

Get Your Penalties Reduced or Eliminated

At The Law Office of Pietro Canestrelli, penalty abatement is one of our core services. We’ve saved clients across Temecula, San Diego, Riverside, San Bernardino, and throughout California thousands of dollars in penalties — often as part of a comprehensive tax relief strategy that also addresses the underlying liability.

Facing IRS or FTB penalties? Contact our office to discuss whether First-Time Abatement, Reasonable Cause, or another penalty relief option can reduce your bill.

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.

The IRS Statute of Limitations Explained: CSED, ASED, and Why Timing Matters

Every IRS tax debt has an expiration date. Every IRS audit window has a closing deadline. Understanding these statutes of limitations — and the circumstances that can extend them — is one of the most important pieces of knowledge a taxpayer can have. At The Law Office of Pietro Canestrelli, we use statute analysis as a foundational tool in every tax resolution strategy we develop for clients across Temecula, San Diego, Riverside, San Bernardino, and throughout California.

The Two Key Statutes

The IRS operates under two primary statutes of limitations that every taxpayer should understand:

• CSED — Collection Statute Expiration Date: The deadline for the IRS to collect a tax debt (generally 10 years from assessment)
• ASED — Assessment Statute Expiration Date: The deadline for the IRS to assess additional tax (generally 3 years from the filing date or due date, whichever is later)

CSED: The 10-Year Collection Clock

Under IRC Section 6502, the IRS generally has 10 years from the date of assessment to collect a tax debt. After the CSED expires, the debt is legally uncollectible — the IRS must write it off, release any federal tax liens, and stop all collection activity.

The “date of assessment” is typically:

• The date the IRS processes your return showing a balance due, or
• The date the IRS finalizes an audit adjustment adding additional tax, or
• The date a substitute for return (SFR) assessment is made when you failed to file

Important: each tax year has its own separate CSED. If you owe taxes for 2018, 2019, and 2020, each year has its own 10-year clock running independently.

What Tolls (Pauses) the CSED

Several events can toll the CSED, effectively pausing the 10-year clock:

• Offer in Compromise (OIC): The clock pauses while the OIC is pending, plus 30 days after rejection or acceptance
• Bankruptcy: The clock pauses during the automatic stay, plus 6 months after the stay is lifted
• Collection Due Process (CDP) hearing: The clock pauses while the hearing and any Tax Court petition are pending
• Taxpayer Assistance Order (TAO): A Taxpayer Advocate case pauses the clock
• Time outside the United States: If you’re abroad for more than 6 consecutive months, the clock pauses
• Installment agreement requests: The clock pauses while the IRS processes your installment agreement request, plus 30 days
• Military service in a combat zone: The clock pauses for the duration of service plus 180 days

Understanding what tolls the clock is critical to resolution strategy. Filing an Offer in Compromise, for example, pauses the CSED — which means if the OIC is rejected after a year of processing, you’ve added a year to the IRS’s collection window. A tax attorney must evaluate the CSED impact before recommending any resolution approach.

Can You Voluntarily Extend the CSED?

The IRS sometimes asks taxpayers to sign Form 900 (Tax Collection Waiver), voluntarily extending the CSED. This typically happens during installment agreement negotiations or OIC processing when the statute is close to expiring.

You are not required to sign Form 900. Refusing to sign may mean the IRS denies your installment agreement or takes faster enforcement action — but it preserves your statute. This is a decision that should always involve counsel.

ASED: The 3-Year Audit Window

Under IRC Section 6501, the IRS generally has 3 years from the later of the date you filed your return or the due date to assess additional tax. After the ASED expires, the IRS cannot audit you for that year or add tax to your account (with important exceptions).

For example:

• If you filed your 2024 return on April 15, 2025: the ASED expires April 15, 2028
• If you filed early (February 15, 2025): the ASED is still measured from the due date (April 15, 2025) → expires April 15, 2028
• If you filed on extension (October 15, 2025): the ASED expires October 15, 2028

Exceptions That Extend the ASED

Several exceptions significantly extend the 3-year window:

• 25% gross income omission: If you omit more than 25% of your gross income from your return, the ASED extends to 6 years
• Fraud: If the IRS proves fraud with intent to evade tax, there is no statute of limitations — the IRS can audit you for that year indefinitely
• No return filed: If you never file a return, the ASED never begins — the IRS can assess tax at any time. This is one of the most compelling reasons to file delinquent returns. See our guide on unfiled tax returns.
• ERC claims: Under the OBBBA, the ASED for Employee Retention Credit claims has been extended to 6 years from the date of the ERC claim — a critical consideration for businesses that received ERC refunds. See our ERTC audit page.
• Foreign income (Form 8938/FBAR): If you fail to report more than $5,000 of income attributable to specified foreign financial assets, the ASED extends to 6 years
• Consent to extend (Form 872): The IRS may request that you sign Form 872 or 872-A, voluntarily extending the ASED. This commonly happens during audits that are taking longer than expected.

How Statutes Affect Your Tax Resolution Strategy

Understanding both the CSED and ASED is essential to developing an effective tax resolution strategy:

When the CSED Is Close to Expiring

If your CSED is within 3-4 years of expiration and your tax debt is significant, the best strategy may be to request Currently Not Collectible (CNC) status and let the clock run. CNC doesn’t toll the CSED — unlike an OIC or installment agreement request. A tax debt resolution plan that accounts for the CSED timeline can save tens of thousands of dollars.

When the ASED Is Close to Expiring

If the IRS contacts you for an audit and the ASED is about to expire, the IRS may ask you to sign Form 872 to extend the statute. You have the right to refuse — but the IRS may respond by issuing a rapid assessment based on whatever information it has, which could be less favorable than a complete audit would produce. This is a negotiation, and having representation matters.

Multiple Years with Different CSEDs

When you owe taxes for multiple years, each year has its own CSED. In a resolution strategy, this means some years may expire sooner than others — and it may make sense to focus payment or settlement efforts on years with longer-remaining CSEDs while letting shorter-CSED years approach expiration.

How to Determine Your CSED

Your CSED is not printed on IRS notices. To determine your CSED for each tax year, you (or your representative) can:

• Request your IRS account transcript (shows the assessment date for each year)
• File a Freedom of Information Act (FOIA) request for your complete account records
• Have a tax attorney or enrolled agent access your IRS records through e-Services or Practitioner Priority Service

The calculation requires identifying the original assessment date, then adding 10 years, and then adjusting for any tolling events. This analysis can be complex — especially for taxpayers who have had installment agreements, pending OICs, CDP hearings, or time abroad.

Get a Professional Statute Analysis

At The Law Office of Pietro Canestrelli, we perform comprehensive statute analysis for every client with outstanding IRS debt. Knowing exactly when each year’s CSED expires — and which resolution strategies will toll it versus preserve it — is the foundation of an effective tax resolution plan.

We serve taxpayers across Temecula, San Diego, Riverside, San Bernardino, and throughout California and the United States. Whether you’re deciding between an OIC and CNC status, evaluating whether to sign a Form 900, or simply need to understand how much time the IRS has left to collect, contact our office for a case review.

Currently Not Collectible Status: How to Qualify When You Can’t Pay the IRS

When you owe the IRS and genuinely cannot pay — when your monthly income barely covers food, housing, medical expenses, and basic living costs — the IRS has a formal designation for your situation: Currently Not Collectible (CNC) status. CNC doesn’t eliminate your tax debt, but it stops the IRS from actively collecting against you — no levies, no garnishments, no Revenue Officer calls — while you get back on your feet.

At The Law Office of Pietro Canestrelli, we’ve helped hundreds of taxpayers across Temecula, San Diego, Riverside, San Bernardino, and throughout California obtain CNC status when they needed it most. Here’s how the process works, who qualifies, and what you need to know before requesting it.

What Exactly Is Currently Not Collectible Status?

Currently Not Collectible is an IRS account status that temporarily suspends all active collection activity on your tax debt. When your account is placed in CNC, the IRS acknowledges that requiring you to pay would create an undue financial hardship — that you cannot meet your basic, reasonable living expenses and pay your tax debt at the same time.

What CNC does:

• Stops all collection actions — no bank levies, no wage garnishments, no asset seizures
• Prevents the IRS from filing new federal tax liens (though existing liens remain in place)
• Suspends Revenue Officer contact and collection enforcement
• Keeps the 10-year Collection Statute Expiration Date (CSED) running — meaning your debt continues to age toward expiration

What CNC does NOT do:

• It does not eliminate or reduce your tax debt — the full balance remains
• Penalties and interest continue to accrue on the outstanding balance
• The IRS can still offset your future tax refunds against the debt
• The IRS reviews your financial situation periodically and can resume collection if your income increases

Who Qualifies for CNC Status?

There is no fixed income threshold for CNC status. Instead, the IRS evaluates your Reasonable Collection Potential (RCP) — the amount you can pay after covering allowable living expenses. If your RCP is zero (meaning your income equals or is less than your allowable expenses), you qualify.

The IRS uses Collection Financial Standards to determine what constitutes “allowable” expenses. These standards set limits for:

• National Standards: Food, clothing, housekeeping, personal care, and miscellaneous expenses — based on family size
• Local Standards: Housing and transportation costs — based on county of residence (California counties typically have higher allowable amounts than the national average)
• Out-of-pocket health care: Age-based allowances for medical expenses not covered by insurance

In high-cost California counties — San Diego, Riverside, San Bernardino, Orange, Los Angeles — the local housing allowance is significantly higher than in most of the country, which can help taxpayers qualify for CNC even with moderate incomes.

Common situations that support CNC qualification:

• Job loss or significant income reduction
• Serious illness or disability that limits earning capacity
• Fixed-income retirees with Social Security as their primary income source
• Single parents with childcare costs that consume available income
• Business owners whose businesses are generating minimal or no income

How to Request CNC Status

Step 1: Gather Financial Documentation

You’ll need to provide the IRS with a complete picture of your financial situation. This typically requires:

• Recent pay stubs or proof of income (last 3 months)
• Bank statements (last 3 months for all accounts)
• Monthly expense documentation (rent/mortgage, utilities, insurance, medical costs, childcare, transportation)
• Documentation of any assets (real estate, vehicles, investments, retirement accounts)

Step 2: Complete the Financial Disclosure Form

The IRS uses Form 433-A (Collection Information Statement for Wage Earners and Self-Employed Individuals) or Form 433-F (Collection Information Statement) to evaluate your financial situation. Form 433-F is a simplified version often used in phone-based CNC requests; Form 433-A provides more detail and is typically required for higher-balance debts or Revenue Officer cases.

Our Form 433-A guide walks through the form in detail. The key is presenting your finances accurately while ensuring all allowable expenses are claimed — the IRS won’t volunteer to include expenses you don’t list.

Step 3: Submit the Request

CNC requests can be made by phone (calling the IRS collection number on your notice), in response to a Revenue Officer’s inquiry, or through a tax attorney or enrolled agent acting as your authorized representative.

Having professional representation is particularly valuable because:

• The representative handles all IRS communication, reducing your stress and preventing you from making statements that could hurt your case
• An experienced representative knows which expenses the IRS allows, how to present your financial picture favorably within IRS guidelines, and when to push back on the IRS’s calculations
• If the initial request is denied, the representative can escalate to a supervisor or pursue administrative appeals

The Strategic Value of CNC Status

CNC status isn’t just a temporary pause — in certain situations, it’s a strategic tool for long-term debt resolution.

The CSED Keeps Running

The IRS has 10 years from the date of assessment to collect a tax debt (the Collection Statute Expiration Date, or CSED). When you’re in CNC status, the CSED continues to run. Unlike an Offer in Compromise (which tolls the statute) or bankruptcy (which also tolls it), CNC lets the clock keep ticking.

If your CSED is approaching — say, 4-6 years remaining — CNC status could result in your debt expiring entirely without paying a dollar. This makes CNC the optimal strategy for taxpayers with limited income, limited assets, and a CSED that’s already significantly burned down.

CNC vs. Offer in Compromise

When should you pursue CNC vs. an Offer in Compromise (OIC)?

• CNC is better when: Your income is genuinely insufficient to make any payments, the CSED is already well advanced, you can’t come up with the OIC application fee and initial payment, or your financial hardship is expected to be long-term.
• OIC is better when: You have some ability to pay (but far less than the full amount), you want a definitive resolution rather than ongoing review, or you want to eliminate the debt entirely rather than waiting for the CSED.

Read our OIC acceptance guide for more detail on whether an offer makes sense for your situation.

What Happens After You’re Placed in CNC?

CNC status is not permanent. The IRS reviews CNC accounts periodically — typically by checking the income reported on your subsequent tax returns. If your income increases significantly, the IRS may reclassify your account and resume collection activity.

Key things to know about life in CNC status:

• File all future returns on time: Failure to file current returns can result in removal from CNC status and resumption of collection. Stay in compliance.
• Refund offsets: The IRS will apply any future tax refunds to your outstanding balance. Consider adjusting your withholding so you don’t generate a refund.
• Existing liens remain: Any federal tax lien filed before CNC was granted remains in place. It won’t be enforced through seizure, but it stays on the public record and affects your ability to sell property or obtain credit.
• Annual review: The IRS uses income triggers to identify CNC accounts where the taxpayer’s financial situation may have improved. If your income rises above a certain threshold, expect contact from the IRS.

California State Tax Debt: A Separate Issue

If you owe taxes to both the IRS and the California Franchise Tax Board, securing CNC status with the IRS does not stop state collection activity. The FTB operates independently and has its own hardship programs. Similarly, the EDD and CDTFA pursue their own collection actions.

A comprehensive debt resolution strategy should address all outstanding tax liabilities — federal, state, and any agency-specific debts — simultaneously. Our attorneys coordinate across all agencies to develop a unified approach.

Get Help Securing CNC Status

At The Law Office of Pietro Canestrelli, we understand that tax debt during financial hardship creates overwhelming stress. Our team works with compassion and urgency to secure CNC status for qualifying taxpayers — stopping collection actions so you can focus on getting back on your feet.

We serve individuals and families across Temecula, San Diego, Riverside, San Bernardino, all of Southern California, and nationwide. If you’re facing IRS collection activity and can’t pay, contact our office today to discuss whether CNC status — or another resolution option — is right for your situation.

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.