Business owners across the country spent the last year planning around the One Big Beautiful Bill Act. Full bonus depreciation is back. Tips and overtime got new deductions. The SALT cap jumped. Those changes are real on your federal return. Whether they reach your state return is an entirely separate question, and in many states the answer is no.

State conformity is the mechanism that determines this, and it is one of the most under-discussed issues in tax planning. Some states adopt federal law automatically as it changes. Others freeze the Internal Revenue Code at a fixed date and decide, provision by provision, whether to follow. A handful decouple from specific provisions permanently regardless of conformity date. If your 2026 projections were built on federal numbers alone, you may have modeled half the picture.

The Law Office of Pietro Canestrelli, A.P.C. advises businesses and high-income individuals on federal and multistate tax planning from offices in Temecula and San Diego, with clients throughout California and across the United States. This article explains how conformity works, which OBBBA provisions most commonly diverge at the state level, and where the planning opportunities remain. To have your position modeled in every state where you file, schedule a consultation with our tax attorneys.

How State Conformity Works

Three models exist, and knowing which applies to you is the starting point for any planning conversation.

• Rolling conformity. The state adopts the current Internal Revenue Code as amended. Federal changes flow through automatically unless the legislature acts to decouple. Most states use this model.
• Static or fixed-date conformity. The state adopts the Code as of a specified date. Congress cannot change state tax law by amending federal law after that date — the legislature must affirmatively update the conformity date.
• Selective conformity. The state adopts only enumerated federal provisions, building its own tax base largely independently.

California is the clearest example of static conformity in practice. Under Revenue and Taxation Code Section 17024.5, the state incorporates the Code as of a specified date. SB 711, signed in October 2025, advanced that date to January 1, 2025 — landing just short of OBBBA and specifically excluding it. Several other fixed-date states face the same lag while their legislatures decide whether to catch up.

The practical result in any non-conforming state is an adjustment schedule reconciling your federal return to the state’s version of taxable income. When federal law moves aggressively and a state stays put, that schedule gets long, and the risk of a mismatch that draws a state notice goes up.

The Provisions Where Divergence Is Most Common

1. Bonus depreciation — the largest and most widespread gap

OBBBA permanently restored 100 percent bonus depreciation for qualified property acquired and placed in service after January 19, 2025. Bonus depreciation is also the single most commonly decoupled provision in the country. A substantial number of states disallow it in whole or in part, requiring an add-back of the federal bonus amount and recovery over standard MACRS lives instead.

California has never conformed to Section 168(k) at any percentage, and it caps Section 179 expensing at $25,000 with a $200,000 investment phaseout — far below the federal limit. Several other states impose their own reduced 179 caps or partial bonus add-backs with multi-year recovery of the difference.

For a contractor buying $600,000 of equipment, this produces a full federal deduction against a state deduction stretched across years. The first-year cash difference is substantial, and it is the most common surprise we see in multistate planning. Our page on the Section 179 deduction covers the federal expensing rules that interact with these limits.

2. No tax on tips and no tax on overtime

OBBBA created above-the-line deductions for qualified tips (capped at $25,000) and qualified overtime (capped at $12,500 single, $25,000 joint), both phasing out above $150,000 of modified AGI and both expiring after 2028. Final regulations under Section 224 published in April 2026 defined qualifying occupations.

Whether your state follows depends entirely on its conformity posture. California does not — tips and overtime remain fully taxable on the state return. Employers in hospitality, healthcare, and construction face two consequences. First, employees who read headlines about tax-free tips will be confused when state withholding does not change. Second, beginning with the 2026 tax year, employers must separately report qualified tips and overtime on Form W-2 using new Box 12 codes, which means payroll systems need configuration now for W-2s issued in early 2027. That reporting obligation is federal and applies regardless of your state’s position.

3. Qualified small business stock

Section 1202 lets qualifying founders and early investors exclude a large portion of gain on the sale of qualified small business stock. Not every state follows. California does not conform to Section 1202 at all, so gain excluded federally is fully taxable at rates reaching 13.3 percent. Other states conform fully, and some fall in between.

For founders approaching an exit, this is not a footnote. It is often the largest single line on the state return in the year of sale, and it drives serious conversations about timing, residency, and structure well before a term sheet exists. Our page on capital gains taxation in the United States covers the federal framework.

4. The SALT cap and pass-through entity elections

The federal SALT deduction cap rose to $40,000 for 2025 and $40,400 for 2026, indexed one percent annually through 2029, with a phasedown of 30 percent of modified AGI above roughly $505,000 and a $10,000 floor. It reverts to $10,000 in 2030.

More than thirty states now offer a pass-through entity elective tax as a workaround, letting the entity pay state tax deductibly at the federal level. California’s election, extended through 2030 by SB 132, runs at a flat 9.3 percent, and for 2026 forward a missed June 15 prepayment reduces the owner’s credit by 12.5 percent of the shortfall rather than voiding the election. Whether any state’s election still pays depends on where your income sits relative to the higher federal cap and its phasedown — the answer changed for many taxpayers this year.

5. Net operating losses

State NOL rules frequently depart from federal treatment through suspensions, deduction caps, and different carryforward periods. California continues to suspend NOL deductions for taxpayers with net business income of $1 million or more through the 2026 tax year, with carryover periods extended in compensation. A business with a genuine federal loss carryforward may still owe state tax on income the federal system treats as offset.

What This Means for Your Planning

The strategic point is not that any particular state is stingy. It is that a plan optimized for one system can be actively harmful in the other, and most planning conversations still start federally and stop there.

• Fixed asset timing. Accelerating purchases for federal bonus depreciation delivers no benefit in a decoupled state. If state liability is your binding constraint, the timing calculus changes.
• Entity selection. The interaction of a PTE election, the QBI deduction, and state conformity affects whether an S corporation still beats an LLC for your facts.
• Compensation planning. Overtime-heavy payrolls now carry a federal-state reporting mismatch requiring employee communication, not just payroll configuration.
• Multistate operations. If you file in several states, you may be applying three or four different depreciation regimes to the same asset. Apportionment magnifies every conformity difference.
• Exit planning. QSBS non-conformity should enter the conversation years before a sale.

The Audit Risk Nobody Talks About

Conformity adjustment errors are among the cleanest assessments a state revenue agency can make. States receive federal return data, compare it against the state filing, and identify missing add-backs computationally. Depreciation add-backs in particular follow a predictable pattern across years, which makes an inconsistency easy to flag.

These typically start as notices rather than field audits, but an unanswered notice becomes an assessment, and an assessment becomes collection. In California, our Franchise Tax Board representation practice handles the response; we represent clients before revenue departments in other states as well, and before the Office of Tax Appeals when a California matter proceeds to appeal.

Frequently Asked Questions

Do states conform to the One Big Beautiful Bill Act?

It depends on the state. Rolling conformity states generally adopt federal changes automatically unless they decouple. Fixed-date states follow only after the legislature updates the conformity date. California, for example, advanced its conformity date to January 1, 2025 while specifically excluding OBBBA.

Are tips and overtime taxable at the state level in 2026?

In non-conforming states, yes. The federal deductions for qualified tips and qualified overtime reduce federal taxable income only. California does not conform, so both remain fully taxable there and state withholding is unaffected.

Which states disallow bonus depreciation?

A substantial number decouple in whole or in part, requiring an add-back and standard recovery. California disallows it entirely and has never conformed to Section 168(k). Because state legislatures revisit this regularly, verify current treatment in each state where you file before relying on a prior year’s approach.

Is a pass-through entity tax election still worth making?

Often, but it depends on your income level and state. The higher federal SALT cap and its phasedown above roughly $505,000 of modified AGI changed the benefit calculation for many taxpayers in 2025 and 2026. The election should be re-modeled rather than renewed by habit.

Does my state tax QSBS gain excluded federally under Section 1202?

Some do. California does not conform to Section 1202, so gain excluded on the federal return is fully taxable there at rates up to 13.3 percent. Other states conform. This deserves attention long before a liquidity event.

What triggers a state notice on conformity adjustments?

State agencies compare federal return data against your state filing. Missing depreciation add-backs, inconsistent adjustments across years, and unreconciled adjustment schedules are among the most computationally detectable discrepancies, which is why they generate notices reliably.

Your Next Step

Federal-to-state divergence is not a filing-season problem. It is a planning problem that has to be solved before December 31, and it now touches nearly every business decision — equipment purchases, payroll, entity structure, and exit timing.

Pietro Canestrelli holds an LL.M. in Taxation and has built his practice around federal and state tax controversy and planning. The firm serves clients throughout Southern California and nationwide, including businesses filing in multiple states. Contact The Law Office of Pietro Canestrelli to have your 2026 plan modeled in every system that applies to you, not just one. Learn more about our business tax and business law services and our work as corporate tax counsel.

TEMECULA, Calif., August 11, 2026 — The Law Office of Pietro Canestrelli, a Tax Controversy Boutique, APC, has been named No. 934 on the 2026 Inc. 5000, the annual list of the fastest-growing private companies in America. The ranking places the firm in the top 18% of honorees, earning it a spot among the nation’s most successful independent and entrepreneurial businesses. The Inc. 5000 recognizes companies that have achieved remarkable growth while driving innovation, creating jobs, and shaping the future of the economy; past honorees include Microsoft, Meta, Chobani, Oracle, and Patagonia.

“This is such an honor,” said founder and owner Attorney Pietro Canestrelli, LL.M., J.D. “We owe this accomplishment to our incredible team as well as the amazing clients who have trusted us over many years to shoulder the burden of one of the most stressful experiences they have encountered in their lifetime. We are grateful, and this is just the beginning. Our goal is to grow to a level where we can impact the way the IRS interacts with taxpayers on a national scale. Our mission is to continue practicing law with passion and compassion, educating and advocating for our tax and business clients so they can sleep at night.”

About the 2026 Inc. 5000

This year’s Inc. 5000 recognizes a new class of companies redefining what growth looks like. From AI and advanced manufacturing to healthcare, consumer products, and professional services, these businesses are expanding their impact, creating jobs, and proving that entrepreneurial ambition continues to fuel the U.S. economy. Among the 5,000 companies on the list, the median three-year revenue growth rate was 130%, and those companies have collectively added more than 627,208 jobs to the U.S. economy over the past three years.

“Every company on the Inc. 5000 has a story of perseverance, smart decision making, and a refusal to sit still,” says Mike Hofman, editor-in-chief of Inc. “Their growth reflects more than strong financial performance – it reflects creativity, resilience, and the customer focus required to build companies that make a lasting impact. We congratulate all honorees on this significant achievement.”

Inc. will celebrate the honorees at the 2026 Inc. 5000 Conference & Gala, taking place October 14–16 in Dallas, Texas, and the top 500 will be listed in the Fall issue of Inc. magazine. For the full Inc. 5000 list, honoree company profiles, and a searchable database by industry and location, visit inc.com/inc5000.

Inc. 5000 List Methodology

Companies on the 2026 Inc. 5000 are ranked according to percentage revenue growth from 2022 to 2025. To qualify, companies must have been founded and generating revenue by March 31, 2022. They must be U.S.-based, privately held, for-profit, and independent — not subsidiaries or divisions of other companies — as of December 31, 2025. The minimum revenue required for 2022 is $100,000; the minimum for 2025 is $2 million.

About the Law Office of Pietro Canestrelli, APC

Founded in 2016, the Law Office of Pietro Canestrelli, a Tax Controversy Boutique, APC (“LOPC”) was built on a simple belief: people facing tax problems deserve more than technical answers. They deserve to be seen, respected, and supported as human beings. That belief is deeply personal to founder Pietro E. Canestrelli, whose perspective on tax law changed permanently after watching his own brother struggle with tax problems during an already difficult time. The experience reinforced for Pietro that tax issues rarely exist in isolation; they often arrive alongside financial pressure, family challenges, business uncertainty, health challenges, and personal loss.

LOPC was created to provide sophisticated tax representation while helping clients move from fear and confusion toward clarity, control, and peace of mind. The firm meets clients where they are by combining attorney-led tax guidance with a highly personal client experience: a dedicated legal team, clear communication, and access to real people who understand their journey. The firm represents individuals and businesses in serious federal and state tax matters, including tax controversies, audits, and collections, expert tax opinions, and proactive tax planning.

That same philosophy shapes how LOPC builds its team. The firm hires not only for skill and experience, but for alignment with its PEACE values: Passion, Education, Advocacy, Compassion, Every Time. Pietro brings 27 years of tax-law experience to the firm. Before entering private practice, he served as an attorney with the IRS Office of Chief Counsel in Washington, D.C., and he holds an LL.M. in Taxation along with specialized credentials in tax law and tax planning. Today, LOPC continues to grow with the goal of reaching more taxpayers without losing the personal, compassionate experience on which the firm was founded.

About Inc.

Inc. is the leading media brand and playbook for the entrepreneurs and business leaders shaping our future. Through its journalism, Inc. aims to inform, educate, and elevate the profile of its community: the risk-takers, the innovators, and the ultra-driven go-getters who are creating the future of business. Inc. is published by Mansueto Ventures LLC, along with fellow leading business publication Fast Company. For more information, visit inc.com.

Read the full announcement on EIN Presswire. Media inquiries: Riannon Canestrelli, Law Office of Pietro Canestrelli, (951) 319-7674, outreach@ietaxattorney.com.

Facing an IRS or state tax problem? Contact the Law Office of Pietro Canestrelli for a free consultation with our Temecula or San Diego office.

If you own a licensed cannabis business anywhere in the United States, you have spent years paying tax on gross profit instead of net income. Section 280E of the Internal Revenue Code has denied you the ordinary deductions every other business takes — rent, payroll, marketing, professional fees — because your product sat on Schedule I of the Controlled Substances Act. That changed in April 2026, but not for everyone, and not in the way most operators assume.

On April 22, 2026, the Department of Justice issued a final order moving state-licensed medical cannabis and FDA-approved marijuana products to Schedule III, effective April 28, 2026. Treasury and the IRS acknowledged the shift carries significant tax consequences. Adult-use cannabis, however, remains on Schedule I and remains fully subject to 280E. For the many operators holding both license types — a structure common in California, Colorado, Michigan, Massachusetts, Nevada, and every other dual-market state — that split creates a genuinely difficult allocation problem and a real audit risk.

The Law Office of Pietro Canestrelli, A.P.C. represents cannabis businesses in federal and state tax matters from offices in Temecula and San Diego, serving clients throughout California and across the country. This article explains what the rescheduling changed, who qualifies for deductions now, how to handle a dual-license operation, and what to do about prior tax years. For a direct answer on your specific license structure, schedule a consultation with our tax attorneys.

What Section 280E Says and Why It Hurt So Much

Section 280E denies any deduction or credit for a trade or business that consists of trafficking in controlled substances listed on Schedule I or Schedule II. The statute is short and blunt. It does not carve out state-legal operations, and courts consistently upheld it against cannabis businesses in every state for more than a decade.

One narrow relief valve always existed. Cost of goods sold is not a deduction — it is a reduction in gross receipts required to arrive at gross income under Section 61 and the inventory rules of Section 471. So cultivators, who can capitalize a large share of production costs into inventory, historically fared better than retailers, whose costs are overwhelmingly the exact selling and administrative expenses 280E disallows. That asymmetry is why dispensaries from San Diego to Denver to Detroit frequently paid effective federal rates north of 60 percent on real economic profit.

What the April 2026 Rescheduling Actually Did

Because 280E applies only to Schedule I and Schedule II substances, moving covered cannabis to Schedule III removes it from the statute’s reach. Businesses within the covered category can deduct ordinary and necessary business expenses under Section 162 like any other taxpayer.

Three limits matter, and they are where operators get into trouble:

• Coverage is narrow. The order reaches state-licensed medical cannabis and FDA-approved marijuana products. Adult-use recreational cannabis stayed on Schedule I.
• Timing is forward-looking. For calendar-year taxpayers, relief generally applies from January 1, 2026 forward. IRS signals have discouraged retroactive claims for closed years.
• Allocation guidance is still pending. Treasury has not issued detailed rules on how dual-license operators split expenses between covered and non-covered activity.

Who Qualifies, and Who Does Not

License designation now carries real federal tax weight, and the terminology varies by state. California distinguishes medicinal (M) from adult-use (A) designations through its Department of Cannabis Control. Other states separate medical and recreational licensure through different regulatory bodies and naming conventions. The federal question is the same everywhere: is this activity state-licensed medical cannabis, or is it adult-use?

Likely covered

• State-licensed medical retailers, distributors, cultivators, and manufacturers operating under valid license
• Businesses handling FDA-approved cannabis-derived pharmaceutical products

Still subject to 280E

• Adult-use operations of any license type
• Unlicensed operators — state licensure is doing real work here
• The adult-use portion of a dual-license business

Delta-8 and hemp-derived cannabinoid businesses sit in their own category governed by the 2018 Farm Bill’s THC threshold, not by this order. If your product line straddles that line, the classification question deserves attention before you file.

The Dual-License Allocation Problem

Most established operators in mature markets hold both medical and adult-use privileges, often selling from the same counter, staffed by the same employees, in the same leased building. Beginning with the 2026 tax year, those shared costs must be split between deductible medical activity and non-deductible adult-use activity.

No safe harbor exists yet. In our experience with allocation disputes across industries, examiners accept methods that are consistently applied, documented contemporaneously, and tied to an economically defensible driver. Methods worth evaluating with counsel include:

1. Gross receipts ratio. Simple and easy to support from point-of-sale data, but crude where medical transactions carry different margins.
2. Transaction count. Better for allocating labor and occupancy where medical sales are smaller-ticket.
3. Square footage and direct tracing. Strongest where you maintain physically separate inventory, registers, or staff.
4. Hybrid. Direct-trace what you can, then allocate genuine shared overhead by a receipts or transaction driver.

Whatever method you choose, choose it before year-end and paper it. The single most common failure we see in audit defense is a reasonable allocation constructed after the notice arrives with no contemporaneous support. That looks like reverse-engineering to an examiner and invites penalties on top of the adjustment. Our business tax audit representation practice handles exactly these methodology fights.

What About Prior Years? The Amended Return Question

Many operators want to file protective refund claims for 2022 through 2025, arguing the rescheduling should apply retroactively. Understand the posture before you spend money on it.

The general refund window under Section 6511 is three years from the filing date or two years from payment, whichever is later. That window remains open for several recent years. But the IRS has signaled it does not view rescheduling as reopening closed positions, and it has previously warned publicly about cannabis operators filing amended returns claiming 280E does not apply. Several large multistate operators pursued that theory before rescheduling and drew significant scrutiny.

A protective claim can preserve the statute while litigation develops elsewhere. That is a strategic decision about audit exposure and cost, not a routine filing. If you are weighing it, talk to a tax attorney rather than filing amended returns and hoping. Our IRS representation team can evaluate the exposure alongside the potential recovery.

Your State Probably Has Different Rules

Federal treatment is only half the calculation. States handle cannabis taxation independently, and several decoupled from 280E for state income tax purposes years before rescheduling. California is among them — licensed commercial cannabis businesses have been permitted state deductions that federal law denied. Other states never adopted 280E conformity at all, while some track federal treatment exactly.

Practically, this means your federal and state returns have been diverging, and the direction of that divergence just shifted. Book-to-tax reconciliation for 2026 will not resemble 2025 in any dual-market state. Whoever prepares your returns needs to model each jurisdiction rather than starting from the federal number and adjusting casually.

Layer on state excise taxes — California’s cannabis excise administered by the CDTFA is one example among many — and you have several tax systems with several sets of rules. Excise and sales tax audits of cannabis retailers have been an enforcement priority in every legal market, and an excise audit frequently produces the records that make an income tax examination easy. Our CDTFA representation practice sees these cases move together in California, and the same pattern repeats nationally.

Five Mistakes to Avoid This Year

1. Assuming rescheduling ended 280E entirely. Adult-use revenue is still exposed. Treating the whole operation as deductible is the fastest route to an adjustment with penalties.
2. Abandoning cost-of-goods discipline. Section 471 inventory methodology still matters for the non-covered side of your business. Do not dismantle the capitalization workpapers protecting you.
3. Choosing an allocation method at filing time. Decide now, document the reasoning, and apply it consistently across quarters.
4. Ignoring entity structure. Some operators are evaluating separate legal entities for medical and adult-use activity. That can clarify allocation but carries licensing, transfer pricing, and business formation consequences that need modeling first.
5. Filing aggressive amended returns without counsel. Refund claims in this space attract attention. Know your exposure before you invite the look.

Frequently Asked Questions

Does Schedule III rescheduling eliminate Section 280E for my dispensary?

Only for the medical portion of your business. State-licensed medical cannabis moved to Schedule III effective April 28, 2026, so 280E no longer applies to that activity. Adult-use cannabis remains Schedule I and fully subject to 280E, which means dual-license retailers must allocate shared expenses between the two.

Can I amend prior year returns to claim deductions 280E denied?

You can file, but not casually. The IRS has discouraged retroactive application and previously scrutinized cannabis operators filing amended returns on 280E theories. A protective refund claim may preserve the statute of limitations, generally three years from filing under Section 6511. Have a tax attorney evaluate the audit exposure first.

What allocation method should a dual-license operator use?

No safe harbor has been issued. Direct tracing of separately tracked inventory, staff, and space is the strongest position, with a gross receipts or transaction-count ratio applied to true shared overhead. Document the method before year-end and apply it consistently.

Do states allow cannabis business deductions?

It varies. Several states, including California, decoupled from 280E for state income tax purposes and permitted deductions federal law disallowed. Others follow federal treatment. Your federal and state calculations may differ substantially and must be prepared separately rather than derived from one another.

Will a state excise or sales tax audit affect my income tax position?

Frequently. Excise examinations produce detailed transaction-level records, and discrepancies between reported excise figures and reported income are a common referral trigger. Coordinating the response across agencies from the outset protects you in ways that handling them separately does not.

Does rescheduling help hemp or delta-8 businesses?

No. Hemp and hemp-derived cannabinoids under the federal THC threshold were never controlled substances subject to 280E, so their tax position is unchanged. If your product line sits near that threshold, the classification analysis deserves attention before filing.

Your Next Step

The rescheduling is real relief, but it is partial relief. The operators who capture it cleanly will be the ones who build defensible allocation records before their first post-rescheduling return is filed. The ones who assume 280E simply disappeared will meet an examiner.

Pietro Canestrelli holds an LL.M. in Taxation and has spent his career representing taxpayers against the IRS and state tax authorities. Our firm serves cannabis operators throughout Southern California and multistate operators nationwide. Contact The Law Office of Pietro Canestrelli to discuss your license structure, allocation methodology, and prior-year exposure. Our Temecula office and San Diego office both handle cannabis tax matters, and we represent clients in every state.

September 15 carries two obligations that land on the same day and catch business owners from opposite directions. It is the due date for third-quarter estimated tax payments, and it is the extended filing deadline for partnerships and S corporations that filed for an extension back in March. Miss the first and you accrue penalties quietly. Miss the second and the penalty arrives per partner, per month, whether or not the entity owes a dollar of tax.

The estimated tax problem has gotten worse in recent years, not better. More people earn income the withholding system was never designed to capture — contract work, platform earnings, equity compensation, rental income, investment gains, and distributions from pass-through entities. If your income shifted during 2026, whether upward from a strong year or through a one-time event, the payments you calculated in April may no longer protect you.

The Law Office of Pietro Canestrelli, A.P.C. advises individuals and businesses on tax compliance and controversy from offices in Temecula and San Diego, serving clients throughout California and nationwide. This article explains who must pay estimated tax, how the safe harbors work, what happens when you fall short, and what the September pass-through deadline actually requires. If you are behind or facing a penalty, schedule a consultation with our tax attorneys.

Who Has to Make Estimated Payments

The federal tax system is pay-as-you-go. Employees satisfy that through withholding. Everyone else satisfies it through quarterly estimated payments under Section 6654 for individuals and Section 6655 for corporations.

You generally owe estimated payments if you expect to owe at least $1,000 in tax after subtracting withholding and refundable credits. In practice, that captures:

• Self-employed individuals and independent contractors
• Partners and S corporation shareholders receiving distributive income
• Landlords and real estate investors
• Retirees with substantial investment or pension income not fully withheld upon
• Anyone with a significant capital gain, option exercise, Roth conversion, or business sale during the year
• Employees whose withholding no longer matches a changed tax picture

The 2026 payment schedule runs April 15, June 15, September 15, and January 15, 2027 for the final installment. The periods are not evenly spaced, which surprises people every year — the third installment covers June through August, a three-month window, while the second covers only two.

The Safe Harbors — Your Actual Protection

You do not need to predict your tax liability perfectly. You need to land inside a safe harbor. Pay at least the smaller of:

1. 90 percent of your current year total tax, or
2. 100 percent of your prior year total tax — increased to 110 percent if your prior year adjusted gross income exceeded $150,000 ($75,000 if married filing separately)

The prior-year safe harbor is the more useful of the two because it is a known number. You can calculate it in January and pay it in four equal installments without forecasting anything. Even if your income doubles, paying 110 percent of last year’s tax protects you from the underpayment penalty — you will owe the balance at filing, but not the penalty.

Two practical points that get missed. First, withholding is treated as paid evenly throughout the year regardless of when it actually occurred. That means increasing withholding late in the year can retroactively cure earlier underpayments in a way that a large September or January estimated payment cannot. If you have any W-2 income, or a spouse who does, adjusting withholding is often the cleanest fix available in the fall.

Second, the annualized income installment method under Section 6654(d)(2) exists for taxpayers with genuinely uneven income. If you earned most of your income in the fourth quarter, this method lets you match payments to when income was actually earned rather than paying in equal quarters. It requires Form 2210 Schedule AI and real recordkeeping, but for seasonal businesses and taxpayers with a single large event, it can eliminate a penalty entirely.

What the Underpayment Penalty Actually Is

It is not a flat fine. It is calculated as interest on each underpayment, running from the installment due date until the earlier of the payment date or the return due date, at the federal short-term rate plus three percentage points, adjusted quarterly and compounded daily.

Because it accrues per installment, a payment made now stops the meter on future accrual but does not undo what has already run. That is the argument for paying as soon as you identify a shortfall rather than waiting to sort it out at filing.

Waiver is available in limited circumstances — casualty, disaster, other unusual circumstances where imposing the penalty would be inequitable, and for taxpayers who retired after age 62 or became disabled during the year, where the underpayment was due to reasonable cause and not willful neglect. These are requested on Form 2210 with a supporting statement.

The Pass-Through Filing Deadline

September 15, 2026 is also the extended due date for calendar-year partnerships filing Form 1065 and S corporations filing Form 1120-S. Both entity types had an original March 16 deadline this year and a six-month extension available.

The late filing penalty is structured differently than most people assume. It is assessed per partner or shareholder, per month or part of a month, for up to twelve months — and it applies even when the entity owes no tax, because these are information returns reporting income taxed at the owner level. A four-partner partnership filing three months late faces a penalty measured in thousands of dollars for a return that reports zero entity-level liability.

C corporations on a calendar year have a different extended deadline of October 15. Trusts and estates filing Form 1041 face a September 30 extended deadline. Nonprofits filing Form 990 face November 16 this year. If you operate multiple entities, the deadlines do not align, and calendaring them separately matters. Our pages on S corporation taxation and limited liability companies cover the entity-level obligations in more depth.

The Owner-Level Trap

Here is the sequence that produces the most damage. A partnership extends its return in March. The partners, lacking final K-1s, guess at their income and make estimated payments based on the prior year. The entity files on September 15 and the K-1s show substantially higher income than anyone projected. The partners now owe a large balance, and because their April, June, and September installments were all calculated on the low estimate, underpayment penalties have been running since April.

The fix is upstream. Partnerships and S corporations that will not file until September should provide owners with a good-faith income projection early enough to inform their quarterly payments — ideally by the June installment. This is a communication problem more than a tax problem, and it is entirely preventable.

Owners in states with a pass-through entity elective tax face an added layer, since entity-level state payments often carry their own prepayment deadlines that do not track the federal calendar.

If You Cannot Pay

Filing and paying are separate obligations, and the penalties differ dramatically. Failure to file runs at 5 percent per month up to 25 percent. Failure to pay runs at 0.5 percent per month, also capped at 25 percent. Filing on time without payment is roughly ten times less expensive than not filing at all.

If the balance exceeds what you can pay, options exist — installment agreements, and in appropriate cases an offer in compromise or a hardship determination. What does not work is silence. An unaddressed balance moves through the notice sequence toward enforced collection, and by the time a lien or levy is on the table your options have narrowed considerably. Our page on managing tax debt and securing relief covers the resolution paths.

Frequently Asked Questions

What happens if I miss the September 15 estimated tax payment?

The underpayment penalty accrues as interest on the shortfall from the installment due date forward, at the federal short-term rate plus three points, compounded daily. Paying as soon as possible stops further accrual on that installment. If you have wage income, increasing withholding may cure earlier shortfalls because withholding is treated as paid evenly across the year.

How much do I need to pay to avoid the penalty?

The lesser of 90 percent of your current year tax or 100 percent of your prior year tax — 110 percent if your prior year adjusted gross income exceeded $150,000. The prior-year figure is usually the safer target because it is a fixed, known amount.

Can I skip quarters and pay everything in January?

No. The penalty is computed per installment period, so a single late payment does not cure earlier missed installments. The exception is withholding, which is deemed paid ratably throughout the year regardless of timing.

What is the penalty for filing a partnership return late?

It is assessed per partner, per month or part of a month, for up to twelve months, and applies even when the partnership owes no tax. S corporations face a comparable per-shareholder penalty. Because these are information returns, having zero liability does not protect you.

Does the annualized income method help me?

It can, if your income was genuinely uneven across the year — a seasonal business, a fourth-quarter business sale, or a late-year capital gain. Filing Form 2210 with Schedule AI matches your required payments to when income was actually earned instead of assuming equal quarters.

Can the underpayment penalty be waived?

In limited circumstances — casualty or disaster, other unusual circumstances where the penalty would be inequitable, or for taxpayers who retired after age 62 or became disabled during the year where the shortfall was due to reasonable cause. Waiver is requested on Form 2210 with a supporting explanation.

Your Next Step

Estimated tax problems compound quietly. A shortfall in April is still accruing in September, and the taxpayers who address it in the fall pay meaningfully less than those who discover it at filing. If your 2026 income diverged from what you projected, this is the quarter to recalculate.

Pietro Canestrelli holds an LL.M. in Taxation and advises individuals, partnerships, and closely held businesses on compliance, penalty abatement, and IRS controversy. The firm serves Southern California and clients nationwide. Contact The Law Office of Pietro Canestrelli to review your estimated payments and entity filing obligations before the deadline. Learn more about our work as income tax counsel and our business formation and planning services.

California’s PTE Elective Tax: The Most Powerful SALT Workaround for Business Owners

If you own an S-corporation, partnership, or multi-member LLC in California, the Pass-Through Entity (PTE) elective tax is arguably the single most impactful tax planning strategy available to you in 2026. While the OBBBA raised the SALT cap to $40,000, that cap still limits high-income Californians — and it phases out above $500,000 MAGI. The PTE election bypasses the SALT cap entirely, allowing your entity to deduct California state taxes as a business expense with no dollar limit.

At The Law Office of Pietro Canestrelli, we help business owners across Temecula, San Diego, Riverside, San Bernardino, and throughout California implement the PTE election and integrate it into comprehensive tax planning strategies. Here’s everything you need to know.

How the PTE Elective Tax Works

California’s PTE elective tax, enacted under AB 150 and extended through 2030 via SB 132, works as follows:

1. Your qualifying pass-through entity elects to pay a 9.3% tax at the entity level on the owners’ pro-rata share of qualified net income
2. The entity-level tax is reported and paid on the entity’s California return (Form 100S for S-corps, Form 565 for partnerships)
3. Each owner receives a credit on their individual California return (Form 540) equal to their share of the PTE tax paid — dollar for dollar offsetting their California personal income tax liability
4. On the federal return, the entity-level PTE tax is deducted as a state tax expense of the business — which is NOT subject to the $40,000 SALT cap because it’s a business deduction, not an individual itemized deduction

The net effect: your California state tax liability is converted from a SALT-capped individual deduction into an uncapped business deduction. For high-income business owners, this can save tens of thousands of dollars in federal taxes.

A Concrete Example

Consider a married couple in San Diego who own an S-corporation generating $600,000 in net income:

Without PTE Election:

• California income tax: ~$56,000 (individual return)
• Federal SALT deduction: Limited to $40,000 (at $600K MAGI, the phase-down may further reduce the cap)
• Effectively, $16,000+ in California taxes gets no federal deduction

With PTE Election:

• S-corp pays PTE tax: $600,000 × 9.3% = $55,800 (entity level)
• Owner receives $55,800 credit on California return → net California cost: same
• Federal deduction: The full $55,800 is deducted as a business expense on the S-corp’s federal return (Form 1120-S) → no SALT cap applies
• Federal tax savings: $55,800 × 37% marginal rate = ~$20,646 in additional federal deduction value

The PTE election saves this couple approximately $20,000+ in federal taxes per year — with no change to their California tax liability. Over the life of the provision (through 2030), that’s potentially $100,000+ in savings.

Who Qualifies for the PTE Election?

The PTE elective tax is available to:

• S-corporations (filing Form 100S)
• Partnerships (filing Form 565)
• Multi-member LLCs taxed as partnerships

The election is NOT available to:

• Sole proprietorships (no entity-level return)
• Single-member LLCs taxed as disregarded entities (no entity-level return)
• C-corporations (not pass-through entities)
• Entities with owners that are not individuals, estates, or trusts (corporate partners generally disqualify the election)

If you’re currently operating as a sole proprietor or single-member LLC and your income is high enough to benefit from the PTE election, restructuring your entity — either by adding a member to your LLC or converting to an S-corp — may be worth the additional administrative cost. Our business formation team can analyze whether restructuring makes sense.

Payment Deadlines and Requirements

The PTE election involves specific payment timing:

• June 15 (of the election year): Prepayment required — the greater of 50% of the prior year’s PTE tax or 50% of the current year’s estimated PTE tax
• Entity return due date (March 15 or September 15 if extended): Remaining balance due
• The election is made annually — you’re not locked in; you can elect or not elect each year

The election itself is made on the entity’s California tax return. All consenting owners must agree to the election. For S-corps, all shareholders must consent. For partnerships and LLCs, the entity needs consent from owners who collectively hold more than 50% of the income interests.

The Credit Mechanics on Your Individual Return

Each owner claims their share of the PTE tax paid as a credit on Form 540, Schedule S. The credit is nonrefundable but can be carried forward for up to 5 years. This means if your credit exceeds your California tax liability in a given year (which is uncommon but possible for lower-income owners of high-income entities), the excess carries forward.

The credit is based on your pro-rata share of the entity’s income — not your ownership percentage. For partnerships with special allocations, the credit follows the income allocation.

Interaction with the SALT Cap

The beauty of the PTE election is its interaction with the federal SALT cap:

• The PTE tax is an entity-level business deduction on the federal return — it flows through Schedule K-1 as a reduction of the owner’s distributive share of income
• It is not an individual itemized deduction subject to the $40,000 SALT cap
• You can still claim up to $40,000 in remaining personal SALT items (property taxes, state taxes on non-business income) as an individual itemized deduction
• The PTE election and the $40,000 SALT cap work together — not in place of each other

For business owners with both significant business income (covered by PTE) and personal SALT items (covered by the $40,000 cap), the combined benefit is greater than either strategy alone. Learn more in our SALT deduction guide.

Common Mistakes with the PTE Election

• Missing the June 15 prepayment: Failure to make the required prepayment can jeopardize the election for the entire year. Set calendar reminders and plan cash flow accordingly.
• Failing to get owner consent: All required owners must consent. Document the consent in entity minutes or a separate consent form.
• Not adjusting federal estimated payments: The PTE tax reduces your pass-through income on the federal return, which should reduce your federal estimated tax payments. Many business owners forget to adjust and end up overpaying federal estimates.
• Ignoring the 1.5% S-corp tax: California S-corps also pay a 1.5% franchise tax on net income (minimum $800). This is separate from the PTE tax and is not creditable against individual California tax. Factor this into your total cost analysis.
• Assuming sole proprietors qualify: They don’t. If you’re a sole proprietor wanting the PTE benefit, you need to restructure your entity first.

PTE Election vs. Other SALT Strategies

The PTE election isn’t the only SALT strategy available to California business owners, but it’s generally the most powerful:

• PTE election (9.3%, uncapped): Best for pass-through business owners at any income level above the standard deduction threshold
• $40,000 SALT cap (individual): Available to all itemizing taxpayers, but phases out above $500K MAGI and caps at $40K
• Charitable remainder trust strategies: Can provide SALT-like benefits for large asset sales but are complex and expensive to implement
• State tax credits: California offers various credits (R&D, film, clean energy) that can reduce state liability — stacking with the PTE election for additional savings

Is the PTE Election Right for Your Business?

The PTE election makes sense for most qualifying California pass-through entities where owners have significant California income tax liability. The math almost always works in favor of the election when:

• The owner’s combined SALT payments exceed $40,000
• The owner’s MAGI puts them in the SALT cap phase-out zone ($500K+ joint)
• The entity has positive net income (no PTE tax benefit when the entity has losses)
• The owner has sufficient California tax liability to absorb the PTE credit

The election generally doesn’t help when the entity has losses, the owner has minimal California tax liability (low income), or the owner is in a very low federal tax bracket (where the value of the federal deduction is minimal).

Get Help Implementing the PTE Election

At The Law Office of Pietro Canestrelli, we help business owners across Temecula, San Diego, Riverside, San Bernardino, and throughout California implement the PTE elective tax as part of a comprehensive tax strategy. From entity restructuring to consent documentation to payment planning, we handle every aspect of the election.

Want to know if the PTE election can save your business money? Contact our office for a tax planning consultation. With the June 15 prepayment deadline behind us, now is the time to plan for next year’s election — and every year through 2030.

Trust Fund Recovery Penalty (TFRP): What California Business Owners Must Know

If you own or manage a business in California and your company falls behind on payroll taxes, you face one of the most aggressive penalties in the entire tax code: the Trust Fund Recovery Penalty (TFRP). Unlike most tax debts, which are owed by the business entity, the TFRP makes you personally liable — piercing the corporate veil of your LLC, S-corp, or corporation. It cannot be discharged in bankruptcy. And it can be assessed against multiple individuals simultaneously.

At The Law Office of Pietro Canestrelli, we defend business owners across Temecula, San Diego, Riverside, San Bernardino, and throughout California against TFRP assessments. Here’s what every business owner needs to understand about this penalty.

What Is the Trust Fund Recovery Penalty?

When an employer withholds federal income taxes, Social Security taxes, and Medicare taxes from employees’ paychecks, those withheld amounts are “trust fund” taxes — they’re held in trust for the U.S. government and must be deposited to the IRS on a regular schedule. The employer is a fiduciary; the money doesn’t belong to the business.

When a business fails to deposit these trust fund taxes, the IRS can assess the Trust Fund Recovery Penalty under IRC §6672 against any individual who:

• Was a “responsible person” — someone with the authority to decide which creditors get paid, and
• Acted “willfully” — knew (or should have known) the taxes weren’t being paid and either failed to act or chose to pay other creditors instead

The TFRP is equal to 100% of the unpaid trust fund portion of the employment tax. If your business withheld $75,000 in employee taxes and didn’t deposit them, you personally owe $75,000 — regardless of whether the business has assets to pay it.

Who Is a “Responsible Person”?

The IRS casts a wide net when identifying responsible persons. You may be considered a responsible person if you:

• Are an officer, director, or owner of the company
• Have authority to sign checks or authorize payments
• Have the power to decide which bills to pay and in what order
• Control payroll processing or accounts payable
• Are authorized to hire and fire employees

The IRS investigates responsible person status using Form 4180 (Report of Interview), which asks detailed questions about your role in the company, your signature authority, and your involvement in financial decisions. Multiple people can be responsible persons for the same tax period — the IRS can (and often does) assess the TFRP against the business owner, the CFO, the bookkeeper, and the payroll manager simultaneously.

Important: having the title of officer isn’t determinative — it’s having the actual authority that matters. A corporate officer who was genuinely uninvolved in financial decisions may have a defense. Conversely, a bookkeeper with no officer title but who decided which bills got paid can be assessed.

What Does “Willfully” Mean?

Willfulness in the TFRP context doesn’t require evil intent or deliberate fraud. It means you had knowledge (or should have had knowledge) that the trust fund taxes weren’t being deposited, and you either:

• Made a conscious decision to pay other creditors instead of the IRS, or
• Showed reckless disregard for whether the taxes were being paid

Common willfulness arguments from the IRS:

• “You continued to pay vendors, rent, and other operating expenses while not paying payroll taxes”
• “You signed checks to other creditors during the period the taxes went unpaid”
• “You knew the company was having financial difficulties and didn’t verify that payroll taxes were current”

The “I delegated it to my bookkeeper and didn’t know” defense is notoriously difficult. The IRS generally argues that a responsible person has a duty to ensure taxes are paid — and delegating without verifying is itself willful.

How the IRS Investigates and Assesses the TFRP

The TFRP investigation typically follows this process:

1. Revenue Officer assignment: An IRS Revenue Officer (RO) is assigned to investigate the unpaid employment taxes
2. Form 4180 interviews: The RO interviews each potential responsible person — asking about their role, authority, knowledge, and actions during the delinquent periods
3. Letter 1153 (Proposed Assessment): If the RO determines you’re a responsible person who acted willfully, they issue Letter 1153 proposing the TFRP assessment
4. 60-day appeal window: You have 60 days to file a formal protest and request an Appeals hearing
5. Assessment: If no appeal is filed (or if the appeal is unsuccessful), the TFRP is assessed as a separate tax liability on your personal account

The 60-day window after Letter 1153 is critical. Once the penalty is assessed, your options narrow significantly. Filing a timely appeal gives you the opportunity to present your case to an independent Appeals officer — and the Appeals process often results in partial or full abatement.

Defenses Against the TFRP

While the TFRP is aggressively enforced, several legitimate defenses exist:

Not a Responsible Person

If you lacked actual authority over financial decisions — you were an officer in name only, or your role was limited to non-financial operations — you may not meet the responsible person test. Evidence includes organizational charts, job descriptions, board minutes, and testimony from other personnel.

Not Willful

If you genuinely didn’t know the taxes weren’t being paid and took reasonable steps to ensure compliance (verifying with the bookkeeper, reviewing bank statements, checking IRS transcripts), you may defeat the willfulness element. This defense works best when combined with evidence that someone else concealed the non-payment from you.

Reasonable Cause

In rare circumstances, reasonable cause — such as the company’s bank unilaterally applying all deposits to outstanding loans, leaving no funds for payroll taxes — can mitigate the penalty.

Partial Liability

Even if you can’t avoid the TFRP entirely, you may be able to limit the periods for which you’re assessed — for example, if you joined the company mid-year and inherited an existing payroll tax problem.

The TFRP Cannot Be Discharged in Bankruptcy

Unlike most tax debts (which may be dischargeable after meeting certain requirements), the Trust Fund Recovery Penalty is never dischargeable in bankruptcy. It follows you indefinitely, subject only to the 10-year Collection Statute Expiration Date. This is one of the reasons the TFRP is considered one of the most dangerous penalties in the tax code.

California Payroll Tax Issues Compound the Problem

If your business has unpaid federal payroll taxes, there’s a high probability you also owe California employment taxes to the Employment Development Department (EDD). California’s payroll taxes include State Income Tax withholding, SDI, UI, and the Employment Training Tax.

The EDD has its own responsible person penalties and its own aggressive collection procedures. The agency participates in the Joint Enforcement Strike Force alongside the IRS, FTB, CDTFA, and DIR — meaning delinquent payroll taxes can trigger multi-agency investigation.

Our EDD payroll tax audit guide covers California-specific payroll issues in detail.

What to Do If You Receive Letter 1153

If you’ve received IRS Letter 1153 proposing a Trust Fund Recovery Penalty, take these steps immediately:

• Do NOT ignore the 60-day deadline. Missing it eliminates your right to an administrative appeal before assessment.
• Contact a tax attorney. The TFRP is a complex area of law with significant personal financial exposure. Professional representation is not optional — it’s essential.
• Gather documentation. Organize corporate records, bank statements, payroll records, organizational charts, and any evidence of your role (or lack thereof) in financial decision-making.
• Do NOT give additional statements to the Revenue Officer without counsel. Anything you say can be used to establish willfulness.

Protect Yourself from the TFRP

At The Law Office of Pietro Canestrelli, we defend business owners across Temecula, San Diego, Riverside, San Bernardino, and throughout California against Trust Fund Recovery Penalty assessments. Whether you’re responding to Letter 1153, preparing for a Form 4180 interview, or negotiating with the IRS Appeals division, our team provides the aggressive, knowledgeable representation your case demands.

Facing a TFRP investigation or assessment? Contact our office immediately. Time-sensitive deadlines are at stake, and every day matters.

ERC Under Fire: What to Do If the IRS Is Auditing Your Employee Retention Credit Claim

The Employee Retention Credit (ERC) was one of the most generous COVID-era tax benefits available to businesses — potentially worth up to $26,000 per employee for qualifying employers. But it was also one of the most aggressively promoted and widely abused credits in IRS history. Now the reckoning is here.

The IRS has sent over 28,000 disallowance letters, demanded repayment of more than $1 billion through 30,000 recapture letters, and launched over 400 criminal investigations related to ERC claims. The One Big Beautiful Bill Act (OBBBA) extended the IRS’s audit window for ERC claims to six years, added new promoter penalties, and blocked refunds for certain late-filed claims.

If your business claimed the ERC and you’ve received — or expect to receive — an IRS examination notice, The Law Office of Pietro Canestrelli can help. We defend businesses across Temecula, San Diego, Riverside, San Bernardino, and throughout California in ERC audit proceedings. Here’s what you need to know.

The Enforcement Landscape in 2026

The IRS has made ERC enforcement one of its top priorities. Key developments include:

• 28,000+ disallowance letters: The IRS denied approximately $5 billion in ERC claims it determined were ineligible
• 30,000+ recapture letters: Businesses that already received ERC refunds are being ordered to pay them back — with interest
• 400+ criminal cases: Promoters and some business owners face criminal fraud charges for fabricating eligibility
• 6-year audit window: The OBBBA extended the statute of limitations for ERC claims from 3 years to 6 years, giving the IRS until at least 2027-2030 to audit most claims
• Promoter penalties: The OBBBA added new penalties targeting the firms that aggressively marketed ERC claims to businesses that didn’t qualify

A February 2026 Government Accountability Office (GAO) report found that approximately 83% of $235 billion in ERC refunds were paid well after the pandemic period — raising concerns about the volume of potentially improper claims. The IRS continues to process remaining claims while simultaneously auditing already-paid refunds.

Common Reasons ERC Claims Get Denied or Audited

Government Order Test Failures

Many businesses claimed ERC based on the “government orders” test — arguing that a federal, state, or local government order fully or partially suspended their operations. The IRS has narrowly interpreted this test, requiring that the order specifically impacted the employer’s operations (not just the industry generally) and that the suspension was more than de minimis (more than 10% of operations, measured by revenue or service hours).

Common denial reasons:

• The business was classified as “essential” and remained open during government orders
• The business voluntarily reduced operations rather than being ordered to do so
• The government order didn’t actually restrict the employer’s specific operations
• The employer couldn’t identify a specific government order that applied to them

Gross Receipts Test Miscalculations

The alternative eligibility path — a significant decline in gross receipts (50%+ for 2020 quarters, 20%+ for 2021 quarters compared to the same quarter in 2019) — requires careful revenue comparison. Errors include comparing wrong quarters, using inconsistent accounting methods, or failing to account for PPP loan proceeds in gross receipts.

Large Employer Wage Issues

For “large” employers (over 500 employees in 2020, over 500 in 2021), only wages paid to employees not providing services are eligible. Many large employers incorrectly claimed credits for active employees.

PPP Double-Dipping

The same wages cannot be used for both PPP loan forgiveness and the ERC. Many claims failed to properly exclude PPP-covered wages from the ERC calculation.

What to Do If You Receive an IRS ERC Notice

Disallowance Letter (Claim Not Yet Paid)

If the IRS sends a letter disallowing your ERC claim before the refund has been issued, you have the right to:

• Respond with additional documentation supporting your eligibility
• Request a conference with the IRS examiner
• File a formal protest and request an Appeals hearing
• If Appeals is unsuccessful, file suit in the Court of Federal Claims or District Court

Recapture Letter (Refund Already Received)

If you already received an ERC refund and the IRS determines the claim was improper, you’ll receive a recapture letter demanding repayment — plus interest from the date the refund was issued. Your options include:

• Paying the full amount if the IRS is correct
• Challenging the recapture through administrative channels
• Negotiating an installment agreement if you can’t pay in full
• Filing an Offer in Compromise if the business can’t afford repayment

Criminal Investigation Contact

If you’re contacted by IRS Criminal Investigation (IRS-CI) — not just the examination division — stop talking immediately and contact a tax attorney. Criminal investigations involve potential fraud charges with penalties of up to $250,000 and 5 years imprisonment per violation. Attorney-client privilege protects your communications — communications with CPAs and enrolled agents do not have the same protection in criminal matters.

The Voluntary Disclosure Program

For businesses that received ERC refunds they now realize they weren’t eligible for, the IRS offered a Voluntary Disclosure Program (VDP) that allowed repayment of 85% of the refund (keeping 15%) without penalties. While the initial VDP windows have closed, the IRS has indicated openness to voluntary corrections on a case-by-case basis.

If your business received an ERC refund and you have concerns about eligibility — especially if a third-party promoter handled your claim — proactive correction is almost always better than waiting for an audit. The cost of voluntary compliance is consistently lower than the cost of enforcement.

What Documentation to Gather Now

Whether or not you’ve received an audit notice, every business that claimed the ERC should have the following documentation readily available:

• Copies of specific government orders that affected your operations, with dates and geographic scope
• Documentation showing how the orders partially or fully suspended your business operations
• Quarterly gross receipts calculations with supporting financial records (tax returns, P&L statements, bank records)
• Payroll records showing which employees were paid and which were not providing services
• PPP loan documents and forgiveness applications showing which wages were allocated to PPP
• The original ERC claim (Form 941-X) and any supporting worksheets
• Communications with any third-party promoter who assisted with the claim

Promoter Liability Under the OBBBA

If a third-party firm prepared your ERC claim and it turns out to be improper, the OBBBA’s new promoter penalties create an avenue for accountability — but the business is still liable for the repayment. The IRS holds the taxpayer responsible regardless of reliance on a promoter.

However, if you can demonstrate that you relied in good faith on a qualified tax professional’s advice and provided all relevant information, this may support a penalty abatement argument (though it won’t eliminate the underlying tax liability). Read our article on the OBBBA’s business updates for more on the new promoter provisions.

Get Experienced ERC Audit Defense

At The Law Office of Pietro Canestrelli, we provide comprehensive ERC audit defense for businesses across Temecula, San Diego, Riverside, San Bernardino, and throughout California. Our team analyzes your claim’s eligibility, prepares supporting documentation, handles all IRS communications, and fights for the best possible outcome — whether that means defending a legitimate claim or negotiating favorable terms for a claim that falls short.

Facing an ERC audit or received a recapture letter? Contact our office immediately. Time-sensitive deadlines apply, and early engagement produces better outcomes.

Form 1099-DA Is Here: What California Crypto Investors Need to Know About the New Reporting Rules

The era of reporting cryptocurrency on the honor system is over. Starting with tax year 2025, custodial crypto brokers — Coinbase, Kraken, Gemini, and others — are issuing Form 1099-DA (Digital Asset Proceeds) to both the IRS and taxpayers, reporting gross proceeds from the sale, exchange, or disposal of digital assets. The IRS now has the same automated matching capability for crypto that it’s had for stocks and bonds for decades.

At The Law Office of Pietro Canestrelli, we’ve helped crypto investors across Temecula, San Diego, Riverside, San Bernardino, and throughout California navigate tax reporting since the early days of Bitcoin. With 1099-DA now live, here’s what you need to know — and what’s coming next.

What Is Form 1099-DA?

Form 1099-DA is the IRS’s new information return for digital asset transactions. It requires custodial brokers (centralized exchanges that hold customer assets) to report:

• Gross proceeds from the sale or exchange of digital assets
• Date of sale for each transaction
• Cost basis (for assets acquired on or after January 1, 2026 — see below)
• Gain or loss (when cost basis is available)

The form is structurally similar to Form 1099-B used for stock and securities sales. It covers all taxable dispositions: selling crypto for cash, exchanging one crypto for another, using crypto to purchase goods or services, and certain DeFi transactions conducted through custodial platforms.

The Cost Basis Gap: The Biggest Problem for 2025 Filing

Here’s the critical issue for crypto investors filing their 2025 returns in 2026: cost basis reporting is only mandatory for assets acquired on or after January 1, 2026. For assets acquired before that date — which includes most long-term holdings — exchanges may report gross proceeds without cost basis, or report cost basis as zero or unknown.

This creates a dangerous mismatch. If your 1099-DA shows $100,000 in gross proceeds and no cost basis, the IRS’s automated matching system treats the entire $100,000 as gain. If your actual basis was $80,000 (meaning the true gain was only $20,000), you’ll receive a CP2000 notice assessing tax on $80,000 of phantom gain — unless you properly report your basis on your return.

To protect yourself:

• Maintain your own records of acquisition dates and costs for all crypto acquired before 2026
• Use crypto tax software (CoinTracker, Koinly, TaxBit, etc.) to reconcile exchange records with on-chain activity
• Report full cost basis on Form 8949 and Schedule D, even if the 1099-DA doesn’t include it
• Keep documentation supporting your basis claims (exchange purchase confirmations, bank transfer records, wallet histories)

Our earlier crypto reporting guide covers this issue in detail, and our broader crypto tax guidance provides foundational context.

What the IRS Can See Now

With 1099-DA in place, the IRS now has automated visibility into:

• Every sale or exchange conducted through a custodial broker
• The identity of the taxpayer making the transaction (via KYC verification)
• The date and gross proceeds of each disposition
• Patterns of trading activity that can be matched against reported income

The IRS’s AI enforcement tools can now cross-reference 1099-DA data with your tax return in near real-time. Discrepancies — unreported transactions, understated gains, or missing 1099-DA income — will trigger automated notices.

DeFi, Non-Custodial Wallets, and What’s Not Reported (Yet)

The current 1099-DA rules apply to custodial brokers only. Several categories of crypto activity are not yet subject to broker reporting:

• Non-custodial wallets: MetaMask, Ledger, Trezor, and other self-custody wallets don’t report to the IRS (they don’t hold your assets or conduct transactions on your behalf)
• DeFi protocols: Decentralized exchanges (Uniswap, SushiSwap), lending platforms (Aave, Compound), and yield farming protocols are not classified as brokers under current rules
• Peer-to-peer transactions: Direct wallet-to-wallet transfers and trades
• NFT sales: Generally not reported on 1099-DA unless conducted through a custodial platform

Important: The absence of broker reporting does not mean these transactions are not taxable. All crypto dispositions are taxable events regardless of whether a 1099-DA is issued. The IRS has access to blockchain analytics tools that can trace transactions across wallets and protocols. Not reporting taxable DeFi income because no 1099-DA was issued is a common — and dangerous — mistake.

California’s Treatment of Crypto Gains

California taxes cryptocurrency gains as ordinary income — the state does not offer a preferential capital gains rate. This means crypto gains in California can be taxed at rates up to 13.3%, on top of federal long-term capital gains rates of 15-20% (plus the 3.8% NIIT for high earners).

The combined federal and California tax rate on crypto gains for high-income California investors can exceed 37%. This makes loss harvesting, holding period management, and basis optimization even more important for California crypto investors than for investors in lower-tax states.

Common Taxable Events That Investors Miss

• Crypto-to-crypto exchanges: Swapping Bitcoin for Ethereum is a taxable event — you’ve disposed of Bitcoin and must recognize gain or loss
• Staking rewards: The IRS considers staking rewards as taxable income at the time they’re received (not when sold), valued at fair market value on the date of receipt
• Airdrops: Free tokens received via airdrop are taxable as ordinary income at fair market value when received
• Mining income: Crypto received from mining is ordinary income, valued at fair market value when received
• Liquidity pool rewards: Tokens earned from providing liquidity are generally taxable as ordinary income
• Wrapped tokens: Wrapping and unwrapping tokens (e.g., converting ETH to wETH) may or may not be taxable depending on the specific mechanism — the IRS has not provided definitive guidance

Responding to a CP2000 Notice for Crypto

If the IRS sends you a CP2000 notice asserting that you underreported income from crypto transactions, it means the automated matching system found a discrepancy between your 1099-DA data and your tax return. This is not an audit — it’s a proposed adjustment.

How to respond:

• If the IRS is correct: Pay the additional tax, or request a payment arrangement
• If the IRS is wrong: Respond with documentation showing your cost basis, holding periods, and correct gain/loss calculations. This is where good record-keeping pays off.
• If you need help: A tax attorney experienced in crypto cases can prepare your response and negotiate with the IRS if the proposed adjustment is incorrect

Visit our IRS letters guide for general guidance on responding to IRS notices.

Planning for 2026 and Beyond

Starting January 1, 2026, cost basis reporting becomes mandatory for newly acquired assets. This means exchanges will track your basis automatically for future purchases — but assets acquired before 2026 remain your responsibility to track.

Action items for the rest of 2026:

• Reconcile all pre-2026 holdings with your own basis records
• Set up crypto tax software if you haven’t already
• Consider tax-loss harvesting before year-end (crypto is not subject to wash sale rules under current law, though this may change)
• Document all DeFi activity, staking rewards, and airdrops contemporaneously
• If you have unreported crypto income from prior years, consider voluntary disclosure before the IRS discovers it through 1099-DA matching

Get Expert Help with Crypto Taxes

At The Law Office of Pietro Canestrelli, we represent crypto investors across Temecula, San Diego, Riverside, San Bernardino, and throughout California in tax planning, compliance, and IRS disputes. Whether you need help reporting complex DeFi activity, responding to a CP2000 notice, or resolving unreported crypto income from prior years, our team understands both the technology and the tax law.

Have crypto tax questions? Contact our office for a consultation.

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.