Form 1099-K Reset: The $20,000/200 Threshold Is Back—But Your Income Still Is, Too

If you sell on marketplaces (eBay/Etsy), take payments through apps, drive gig work, or run any kind of side hustle, Form 1099-K is still the #1 source of filing-season confusion.

Here’s what actually changed under OBBB—and what didn’t.

1) The reset: the old TPSO threshold is back (retroactively)

OBBB retroactively reinstated the pre-ARPA 1099-K reporting threshold for third-party settlement organizations (TPSOs) (think payment apps and online marketplaces).

A TPSO generally isn’t required to file a 1099-K unless both are true:

• gross payments for goods/services exceed $20,000, and

• number of transactions exceeds 200.

Important nuance: This is a reporting rule for TPSOs. It does not change whether the money is taxable.

2) Why you can still get a 1099-K for tiny amounts (and why you shouldn’t panic)

Payment cards have no de minimis threshold

IRS is explicit: there is no threshold to receive a 1099-K due to payment card transactions. They literally note that if you received $0.01 from payment card transactions, you should receive a 1099-K for those payments.

Even under the TPSO rule, you can still receive a 1099-K below $20k/200

IRS also says “not necessarily” when people assume the $20k/200 rule means no form—TPSOs may still send a 1099-K below the federal threshold.

Takeaway: A 1099-K is not a bill. It’s an information return. You still need to classify what the payments represent.

3) States may have lower thresholds (so you can get a form even if you’re under federal)

IRS flags that your state may have a lower reporting threshold for TPSOs, which can result in you receiving a 1099-K even when you don’t exceed the federal $20k/200 standard.

This is why people get a 1099-K and assume “the federal rule didn’t apply, so it must be wrong.” The form may be correct under state-level reporting.

4) “No 1099-K” does not mean “no tax”

IRS is direct: yes, you still have to report income even if it’s not reported on a 1099-K. The threshold doesn’t control taxability.

Translation: The tax rule is “income is taxable unless excluded.” The reporting form is just how IRS gets visibility.

5) The form reports gross payments (not your profit)

This is where mismatch notices come from.

IRS explains the “gross payment amount” on 1099-K is the total processed payments and doesn’t include adjustments like fees, refunds, shipping, discounts, etc. Those items aren’t automatically “income,” and you generally use your records to compute the right taxable amount.

So if you blindly drop Box 1a into “income” without backing out fees/refunds/cost basis, you can overstate taxable income.

Filing-season playbook: how to reconcile your 1099-Ks (fast)

Step 1: Classify what the payments actually were

• Business sales / services → potentially taxable, goes through Schedule C / business return.

• Personal transfers (friends/family reimbursements) → not business income, but still needs clean support if it’s mixed in.

• Selling personal items → taxable only if there’s a gain; losses on personal-use items generally aren’t deductible. (This is a common “1099-K panic” case.)

Step 2: Reconcile Box 1a to your actual records

Start with 1099-K gross, then reconcile:

• platform/processing fees

• refunds/returns

• shipping collected vs shipping paid

• sales tax/VAT collected (if included in gross)

• cost of goods sold / basis for items sold

IRS explicitly warns the gross number is not adjusted for many of those items.

Step 3: Keep an “audit-ready” support file

Save:

• monthly platform statements

• payout reports

• refund logs

• fee summaries

• inventory/basis documentation (even simple spreadsheets beat nothing)

“No Tax on Car Loan Interest” for 2025–2028: The VIN-on-the-Return Deduction (With Strings Attached)

OBBB added a new federal deduction that sounds simple—deduct your car loan interest—but it comes with enough conditions that plenty of people will miss it or claim it wrong. The IRS built this one to be documentation-forward: income limits, vehicle eligibility rules, and a VIN requirement on the tax return.

Quick reminder: this is federal. Your state may not follow it automatically.

1) What it is: up to $10,000/year of car loan interest (2025–2028)

For tax years 2025 through 2028, eligible taxpayers can deduct up to $10,000 per year of interest paid on a qualified vehicle loan for personal use.

This is a deduction, not a credit—so the tax benefit depends on your bracket.

2) Income limits: it phases out above $100k / $200k MAGI

The IRS states the deduction phases out when modified adjusted gross income (MAGI) exceeds:

• $100,000 (single), or

• $200,000 (married filing jointly).

Practical takeaway: If you’re near the threshold, a bonus, RSU vest, Roth conversion, or capital gains can partially or fully eliminate the deduction. Run the numbers before you count on it.

3) Vehicle eligibility: “new to you” + final assembly in the U.S. + VIN on the return

This deduction is not “any car loan.”

The IRS guidance highlights three compliance anchors:

A) The vehicle must be new to the taxpayer

The IRS describes the vehicle as needing to be “new” for the taxpayer (i.e., you can’t recycle an old loan or claim this on a vehicle you already owned).

B) Final assembly in the U.S.

IRS materials emphasize that final assembly must occur in the United States for a vehicle to qualify.

C) VIN requirement on the return

This is the big one: the IRS states taxpayers must include the vehicle identification number (VIN) on the return to claim the deduction.

Translation: If you don’t have the VIN handy at filing time, you’re going to stall. Get it now.

4) Lender reporting + 2025 transition guidance: what borrowers should do

Lenders have reporting obligations

The IRS notes that lenders have reporting requirements to support the deduction (i.e., information returns / statements that identify qualified vehicle interest).

But 2025 is a transition year (don’t assume the form will be perfect)

Treasury/IRS issued transition guidance for tax year 2025 because systems and forms won’t all be instantly aligned. In plain terms: there may be gaps in how clearly your lender’s forms break out “qualified” interest under the new rules.

What to do as a borrower (simple and practical):

• Keep your year-end loan statement(s) that show interest paid in 2025.

• Save your purchase/financing docs (purchase contract + loan agreement).

• Save documentation supporting final assembly in the U.S. (manufacturers and dealer documentation are often the easiest).

• Capture the VIN now (photo of door jamb label or registration).

This is the difference between “smooth filing” and “two weeks of back-and-forth with your lender and preparer.”

5) Common mistakes we expect this filing season

1. Claiming the deduction on a vehicle that doesn’t meet final assembly rules.

2. Assuming any vehicle loan interest qualifies (business-use or mixed-use scenarios require extra care).

3. Forgetting the VIN and losing time at filing.

4. Ignoring the MAGI phaseout and overclaiming the deduction.

5. Relying on lender forms alone in 2025 instead of keeping your own support file.

Filing-season checklist (60 seconds)

If you financed a vehicle in 2025 and want this deduction:

• Confirm MAGI is under/near $100k single / $200k joint (or you understand the phaseout).

• Confirm final assembly in the U.S.

• Confirm the vehicle is “new to you.”

• Pull the VIN and store it with your tax file.

• Save loan statements showing interest paid in 2025.

The $6,000 Senior Deduction for 2025–2028: Who Gets It, Phaseouts, and Common Misreads

OBBB added a new federal deduction that’s simple on the surface and easy to miss in practice: a $6,000 deduction for eligible individuals age 65+ for tax years 2025–2028. If both spouses qualify, it can be $12,000—but only if you meet the income rules and filing conditions.

This is one of those changes where filing-season errors will come from software settings, income phaseouts, and people confusing it with the older senior standard deduction add-on.

1) What it is: $6,000 per eligible person (2025–2028)

For tax years 2025 through 2028, eligible taxpayers can claim an additional deduction of:

• $6,000 for one qualifying individual age 65+, or

• $12,000 if both spouses qualify on a joint return.

This is a deduction, not a credit—so the benefit depends on your marginal tax rate.

2) Who qualifies (eligibility mechanics that matter)

Age test (the simplest rule)

You qualify if you’re age 65 or older. The IRS frames it as “individuals age 65 and older” for the deduction.

Common-sense read: If you turned 65 anytime in calendar year 2025, you’re 65 by year-end and should be eligible for the 2025 tax year.

Filing + identification conditions (easy to miss)

The IRS guidance includes basic conditions like:

• you must include a Social Security Number on the return, and

• if married, you generally must file jointly to claim the deduction for both spouses.

(If you file separately, don’t assume you’ll get the same result—run it both ways.)

3) The phaseout: where people lose the deduction without realizing it

This deduction phases out based on modified adjusted gross income (MAGI):

• Phaseout begins when MAGI exceeds $75,000 (single) or $150,000 (married filing jointly).

What to tell clients: If you’re near those thresholds, a bonus, Roth conversion, capital gains, or a big distribution can dilute or eliminate the deduction.

4) The biggest confusion point: this is in addition to the existing senior standard deduction add-on

Most people already know there’s an additional standard deduction amount for age 65+ (and for blindness). The new $6,000 senior deduction is separate and is in addition to the existing senior add-on. The IRS makes this clear in its OBBB explanations.

Why this matters: Some filers (and some preparers) will assume the new deduction “replaces” the old one. It doesn’t.

5) Common misreads (where returns get filed wrong)

1. “I’m 65 in 2026, so I can take it on my 2025 return.”
   No—this is a tax-year-based deduction. You need to meet the age requirement for the tax year you’re filing.

2. “We file MFS; we’ll still get the full $12,000.”
   Not necessarily. Filing status rules matter. Run the scenarios.

3. “My income is too high; this doesn’t apply.”
   Maybe. The phaseout starts at $75k/$150k MAGI, but you may still get a partial deduction depending on where you land.

4. “My software will catch it.”
   Usually—but the first year of any new deduction is when inputs and data-mapping errors happen. Verify.

6) Filing-season checklist (fast)

If you’re 65+ (or helping parents):

• Confirm date of birth is correctly entered in the software/workpapers.

• Confirm the return reflects:

  • the existing additional standard deduction for 65+, and

  • the new $6,000 senior deduction (if eligible).

• Check MAGI vs $75k/$150k thresholds so you know whether the deduction should be full/partial/none.

“No Tax on Tips” + “No Tax on Overtime”: What’s Deductible on the 2025 Return (and What Payroll Has to Prove)

These two new deductions are real for tax year 2025 (filed in 2026), but they’re also compliance-driven. The IRS designed them so the deduction is tied to what’s reported (W-2/1099/other statements), which means the biggest filing-season failures will be payroll coding, documentation, and mismatched reporting—not math.

Quick reminder: this is federal. States may or may not follow it (California generally won’t automatically conform).

1) “No Tax on Tips” deduction (2025–2028): the rules that matter

Who qualifies (plain English)

For 2025–2028, employees and self-employed individuals can deduct qualified tips if:

1. the tips were earned in an occupation the IRS lists as one that customarily and regularly received tips on or before Dec 31, 2024, and

2. the tips are reported on a Form W-2, Form 1099, or other specified statement, or are reported by the individual on Form 4137.

What counts as “qualified tips”

The IRS fact sheet describes qualified tips as voluntary cash or charged tips received from customers or through tip sharing.

Dollar limits and phaseouts

• Max deduction: $25,000/year

• Phaseout: begins when modified AGI > $150,000 (or $300,000 joint)

• Self-employed cap: your deduction can’t exceed your net income (before this deduction) from the business where you earned the tips.

Restrictions people will miss

• Not eligible if you’re self-employed in a Specified Service Trade or Business (SSTB) under §199A; employees whose employer is an SSTB also aren’t eligible.

• You must include your SSN on the return, and if married you must file jointly to claim it.

IRS “list of tipped occupations”

Treasury/IRS issued guidance and proposed regulations listing nearly 70 occupations and grouping them into categories (food/beverage, hospitality, personal services, transportation/delivery, etc.).

2) “No Tax on Overtime” deduction (2025–2028): what counts (and what doesn’t)

The deduction is only the “premium” portion

For 2025–2028, you can deduct qualified overtime compensation—specifically the pay that exceeds your regular rate, such as the “half” portion of “time-and-a-half” that is required by the Fair Labor Standards Act (FLSA).

Dollar limits and phaseouts

• Max deduction: $12,500/year (or $25,000 joint)

• Phaseout: begins when modified AGI > $150,000 (or $300,000 joint)

Reporting requirement (this is the key)

The overtime amount must be reported on a Form W-2, Form 1099, or other specified statement.

And same as tips: SSN required, and married taxpayers must file jointly.

3) The part employers need to take seriously: reporting is part of the design

The IRS is explicit: employers and other payors are required to file information returns (to IRS or SSA for W-2) and furnish statements to taxpayers showing:

• for tips: certain cash tips received and the occupation of the tip recipient

• for overtime: the total qualified overtime compensation paid during the year

Transition reality for tax year 2025

Treasury/IRS acknowledged that many employers don’t have the systems in place yet and that Forms W-2 and 1099 for tax year 2025 will not be updated for the new fields. So they issued penalty relief for tax year 2025 for these new reporting requirements (Notice 2025-62).

Important: penalty relief ≠ “ignore it.” IRS encourages employers to provide employees/payees separate accountings (e.g., portal, written statement, secure method), including potentially showing qualified overtime in Box 14 on the W-2.

4) Filing-season playbook (employees + businesses)

If you’re a worker receiving tips/overtime

• Save paystubs / year-end statements that break out:

  • tip income (cash + charged tips, plus tip pooling amounts), and

  • overtime premium portion (not just total OT pay)

• Confirm your occupation is on the IRS tipped list if you plan to claim the tips deduction.

• If you’re near $150k / $300k MAGI, run the phaseout math before you assume the deduction will survive.

If you’re an employer/payor

• Validate your payroll system can:

  • tag tipped occupation codes (where applicable), and

  • calculate/store the qualified overtime premium portion (FLSA “half” component)

• Stand up a year-end employee statement process for 2025 (because the W-2 may not carry the dedicated fields).

• Treat 2025 as the “transition year” to get clean for 2026+ reporting even if penalties are relaxed in 2025.

OBBB Filing Season 2026: The 2025 Return Changes That Actually Move the Needle

The One Big Beautiful Bill Act (OBBB) is live for tax year 2025 (the returns you file in 2026). Net: it changes multiple “everybody-touch” areas—deductions, reporting, and credits—and the mistakes will cluster in the same places: people assuming (1) they still itemize the same way, (2) a missing tax form means “not taxable,” or (3) credits still exist after the cutoff date.

Below is the hub you can use to sanity-check your 2025 return before you file.

The two numbers to know first: Standard deduction got bigger (2025 and 2026)

If you’re deciding whether to itemize, start here. The IRS lists these OBBB standard deduction amounts:

Tax year 2025 (filed in 2026):

• Single / Married filing separately: $15,750

• Married filing jointly / Qualifying surviving spouse: $31,500

• Head of household: $23,625

Tax year 2026 (filed in 2027):

• Single / Married filing separately: $16,100

• Married filing jointly / Qualifying surviving spouse: $32,200

• Head of household: $24,150

Why this matters: A higher standard deduction means fewer people benefit from itemizing—so a bunch of “new” itemized-friendly rules only matter if you actually itemize.

The “10-minute checklist” (what to scan before you file)

1) SALT cap: higher for 2025 (but not for everyone)

OBBB increases the SALT deduction cap to $40,000 starting in 2025, with 1% increases in 2026–2029, and it phases down at higher incomes.

Action: Don’t assume this helps you. It only helps if you itemize, and the phase-down can blunt the benefit.

2) “No tax on tips” + “no tax on overtime”: these are deductions, with reporting strings attached

The IRS frames these as new deductions effective 2025–2028:

• Tips: up to $25,000, with eligibility rules and phaseouts over $150k / $300k MAGI; requires W-2/1099/other reporting and occupation rules.

• Overtime: up to $12,500 (or $25,000 joint) for the overtime “premium” portion; similar phaseouts and employer reporting requirements.

Action: If you’re an employer, this is a payroll/reporting systems issue. If you’re a worker, this is a “make sure the forms support the claim” issue.

Deeper post: “No Tax on Tips + No Tax on Overtime: What’s Deductible on the 2025 Return (and What Payroll Has to Prove)”

3) Car loan interest deduction (new, 2025–2028): VIN-on-the-return compliance

The IRS: up to $10,000/year of interest for a qualified personal-use vehicle loan, with income phaseouts over $100k / $200k MAGI and a VIN requirement on the return.

Action: If you bought/financed a new vehicle in 2025, gather your loan statements and VIN now—don’t make filing a scavenger hunt.

4) Senior deduction (2025–2028): $6,000 per eligible individual

The IRS: individuals 65+ can claim an additional $6,000 deduction (so $12,000 if both spouses qualify), with phaseouts over $75k / $150k MAGI.

Action: Confirm your software/preparer is stacking this correctly—it’s separate from the existing age-based standard deduction add-on.

5) Energy credit cutoffs: dates matter more than intentions

Treasury/IRS issued FAQs on accelerated terminations/phaseouts for multiple energy provisions under OBBB (including home energy credits and vehicle credits).

Action: If you’re claiming energy credits on a 2025 return, build a file with: purchase/placed-in-service dates, invoices, manufacturer docs, VINs (where relevant). This is documentation-heavy now.

6) 1099-K threshold reset: fewer forms, same taxable income

The IRS confirms OBBB reinstated the old 1099-K threshold: third-party settlement organizations generally don’t have to file unless gross payments exceed $20,000 AND transactions exceed 200.

Action: “No 1099-K” does not mean “not taxable.” Reconcile marketplace/app deposits to your books anyway.

7) Business interest (163(j)): bigger deductions for some leveraged businesses

IRS guidance: for tax years beginning after Dec 31, 2024, OBBB changes 163(j) by allowing an addback for depreciation, amortization, and depletion when computing adjusted taxable income (ATI).

Action: If you’re leveraged (or have large depreciation), your 2025 interest limitation model may be wrong. This is a provision/forecast issue, not just a return-prep issue.

One CA-specific callout (because people get burned here)

Federal change ≠ California change. California conformity is separate. Treat your CA return as its own model, especially around SALT planning and any new “no tax on…” deductions.

Individual + Mobility Items for 2026: Alimony Treatment Changes + AB 1518 Nonresident Alien Group Returns

Two niche rule changes drive outsized “surprise tax” outcomes in 2026. If you advise individuals in divorce or manage global talent touching California, you should brief these now—before facts lock in.

1) Alimony / spousal support: the “date of instrument” now drives California tax treatment

Where California has been: California generally treated alimony as deductible to the payor and taxable to the recipient (even after federal changed).

What changes for 2026 divorces: SB 711’s amendments add a rule that certain alimony-related provisions won’t apply for:

• divorce/separation instruments executed after December 31, 2025, and

• instruments executed on/before December 31, 2025 that are later modified after that date under specified circumstances.

Practical meaning (what you tell clients)

• If the divorce agreement is executed in 2026, don’t assume you’ll get the old California deduction/inclusion dynamic. The state is effectively moving to a new regime for post-2025 instruments.

• If an older agreement is modified after 12/31/2025, the modification can be the tripwire. Treat modifications as a tax event that needs review, not “paperwork.”

“Do this now” checklist (divorce + post-divorce clients)

• Pull the execution date of the divorce/separation instrument.

• For any 2026 execution or post-2025 modification, run a CA impact memo as part of the negotiation package (not after).

• Align the legal team + tax team: this is a drafting/timing issue as much as a tax issue.

2) AB 1518: nonresident alien group returns become permanent (and penalties get defanged)

This is a compliance and risk-management win for companies with international employees visiting/working in California who don’t have (or can’t easily obtain) SSNs/ITINs.

What AB 1518 does (effective 1/1/2026)

FTB’s bill analysis is clear AB 1518:

• Removes the Jan 1, 2026 sunset and makes the group return election permanent for nonresident aliens.

• Makes permanent the SSN/ITIN relief (FTB can’t require it for filing certain state documents).

• Makes estimated payment penalties inapplicable for nonresident individuals electing into the group return, specifically operative for tax years beginning on/after Jan 1, 2026.

Practical meaning (what you tell HR/Global Mobility/Payroll)

• Group returns are now a durable tool, not a temporary workaround.

• If you’re running group returns, the “estimated tax penalty” risk drops materially for electors (starting with 2026 tax years).

“Do this now” checklist (mobility programs)

• Confirm you have a group-return workflow owner (Tax / Payroll / Mobility) and a documented process.

• Track days in CA, CA-source comp, and withholding at the individual level—even if you file group.

• Coordinate with your agent/provider to ensure your 2026 policy reflects the now-permanent rules.

CTA

If a client is divorcing in 2026 or you manage global talent working in CA, this is a must-brief.

Market-Based Sourcing Goes Live in 2026: What Changes, Who Gets Hit, and How to Audit-Proof Your Receipts

If your business sells services, software/SaaS, subscriptions, licenses, or other intangibles into California, the state just raised the bar on how you’re supposed to source revenue into the California sales factor. This is one of those rules that doesn’t look scary until you get audited—and then it’s expensive.

California’s Franchise Tax Board (FTB) finalized amendments to Cal. Code Regs., tit. 18, §25136-2 (market-based sourcing for sales other than tangible personal property). The FTB’s final rulemaking file makes the key point clear: the amendments are designed to apply prospectively for taxable years beginning on or after January 1, 2026.

What “market-based sourcing” actually means (in plain English)

California generally wants service and intangible receipts sourced to where the customer receives the benefit (or where the intangible is used), not where you performed the work or where your team sits.

So a company headquartered in Texas can still have a big California sales factor numerator if it sells to customers who use/benefit in California.

What changed for 2026 (the practical delta)

The amended regulation is meant to be more structured and more auditable—especially for industries and fact patterns where the old rules created ambiguity.

From the FTB’s final statement of reasons, you can see they explicitly moved the applicability date to January 1, 2026 to ensure the amendments apply prospectively.

Separately, the FTB’s Tax News Flash notes the amendments were approved by the Office of Administrative Law, filed with the Secretary of State on Aug 27, 2025, and have an effective date of Oct 1, 2025 (effective date ≠ when you’ll typically feel it on filed returns; the “first filing season impact” is the 2026 tax year for calendar filers).

Who gets hit hardest

You should assume this matters if you have any of the below:

• SaaS / subscriptions / cloud services sold to customers with multi-state users

• Professional services with lots of clients (think agencies, consultancies, managed services, legal/accounting-adjacent firms)

• Licensing (software, IP, content, brand, data, know-how)

• Financial services / asset management and other intangible-heavy revenue streams

• Any business where your “customer location” data is messy or inconsistent across systems

Translation: if your revenue model scales by adding customers—not by adding physical shipments—this is your problem.

The core issue: your data model drives your tax result

These rules don’t just live in a tax workpaper. They live in your CRM, billing platform, product analytics, and contracts. If your data can’t answer “where is the customer receiving the benefit/using the product,” you’ll end up defaulting to weak assumptions—and that’s where audits get leverage.

The regulation itself bakes in a hierarchy concept: determine location, then reasonably approximate when you can’t, and in certain cases fall back to billing address. You can see this structure in the regulatory text around reasonable approximation and billing address fallback for intangible use.

Practical playbook: what you need to do before your first 2026 provision run

1) Inventory your revenue streams (don’t lump everything together)

Break revenue into buckets that map to sourcing rules:

• services (implementation, consulting, support)

• SaaS/subscriptions

• licenses/royalties

• data/content

• other intangibles

If you source “total revenue” using a single blunt method, you’re asking for an adjustment.

2) Decide your sourcing “signal” for each bucket

For each bucket, define the primary data you will use to determine customer location / benefit location:

Common signals that hold up better

• “Ship-to” / service delivery location for location-based services

• user seat locations (admin-defined) for SaaS

• usage telemetry by jurisdiction (when it’s actually reliable)

• customer legal entity location plus documented user/benefit location when different

Signals that are weaker but sometimes necessary

• billing address (works as a fallback, but it’s not always the “benefit” location)

• HQ state when your customer is national/global (often wrong)

The FTB’s rulemaking file shows they were explicitly debating reliance on billing address and trying to align sourcing to where the benefit is received, which is exactly what auditors will push on.

3) Write down your “reasonable approximation” method

If you can’t pinpoint the location cleanly, you need a documented approximation method that is:

• consistent

• tied to real business records

• explainable in one page

This is not optional. The regulation contemplates reasonable approximation when exact location can’t be determined.

4) Build an “audit file” now, not during the exam

Keep a sourcing support package for 2026 with:

• a one-page policy memo: what we source, how, and why

• system screenshots/data extracts showing where your sourcing fields come from

• contract language showing customer locations / user locations when available

• a mapping of revenue streams → sourcing method → underlying data source

• a sample set of customer files showing the method in action

The FTB’s commentary makes clear they’re trying to reduce confusion and push toward more administrable, supportable application.

5) Pressure-test “big customer” edge cases

These are the ones that swing dollars and attract scrutiny:

• enterprise customers with multi-state operations

• reseller/channel structures

• services delivered remotely but benefiting an in-state operation

• intangible use that moves over time

What to expect in audits (and how taxpayers lose money quietly)

Most market-based sourcing disputes come down to one question:

Can you prove your numerator?

If you can’t, you’ll get forced into an approximation you don’t like—or worse, a default that inflates California receipts. The taxpayers who win are the ones who show up with a clean story and clean data.

CTA

If you sell services/SaaS, align your revenue data model with the sourcing rules before the first 2026 provision run.

PTET 2026–2030: SB 132 Rules, Prepayment Mechanics, and the 12.5% Haircut Nobody Wants

California’s Pass-Through Entity Elective Tax (PTET) remains one of the cleanest ways for many S-corp and partnership owners to improve federal deductibility of state taxes. But starting with tax years beginning on/after Jan 1, 2026, SB 132 effectively reboots the program through 2030—and adds a new trap: you can still elect even if you miss the June 15 prepayment, but your owners’ credit can get haircut by 12.5%.

If you want PTET to work the way it’s supposed to, you need process, not hope.

1) What SB 132 does (the headline)

SB 132 creates a new PTET election and a new owner-level credit for taxable years beginning on/after Jan 1, 2026 and before Jan 1, 2031 (i.e., 2026–2030 for calendar-year entities).

This new regime is intended to mirror the prior PTET structure that existed for 2021–2025, but it’s implemented as a new set of rules for 2026–2030.

2) The payment mechanics you must calendar (June 15 + original return due date)

Under SB 132, the elective tax is due in two tranches:

Payment #1: By June 15 during the taxable year

Pay the greater of:

• 50% of the elective tax paid for the prior year, or

• $1,000

Payment #2: By the due date of the original return (no extension)

Pay the remaining balance: elective tax minus the June 15 payment.

Operational takeaway: PTET is not “pay it when you file.” It’s a mid-year cash event plus a filing-deadline cash event.

3) The new trap: you can elect even if June 15 is missed — but the credit gets cut

Here’s the big behavioral change SB 132 introduces:

• Even if the required June 15 payment is not made or is less than required, the entity can still make the election.

• But the owner-level credit is reduced by 12.5% of the amount that should have been paid by June 15 but wasn’t, based on the owner’s share.

Translation: California moved from “miss June 15 and you’re out” to “miss June 15 and you’re still in—just with a permanent haircut.”

Quick example (plain English)

If the entity should have paid $100,000 by June 15 and only paid $60,000, the shortfall is $40,000. The owners’ PTET credit attributable to that unpaid $40,000 gets reduced by 12.5% (i.e., $5,000 of credit value evaporates).

That’s avoidable. You’re basically paying a penalty through the credit mechanism.

4) The SALT “trigger risk”: this PTET regime can turn off if federal rules change

SB 132 includes an inoperative/repeal mechanism tied to the federal SALT itemized deduction limitation:

• The new PTET regime is structured to be operative only while the federal SALT limitation is in place (the bill analysis frames it as operative only if the federal limitation is extended).

• If the federal SALT limitation is repealed before Dec 1, 2031, the California PTET provision becomes inoperative for taxable years beginning on or after the January 1 following the repeal, and is repealed on Dec 1 of that year.

Practical impact: PTET planning is still worth doing, but don’t treat it as “permanent law.” Build flexibility into forecasts and owner estimates.

5) A planning nugget that matters for projections: PTET credit and the $5M credit limitation

California has a separate concept that limits the use of business credits (commonly discussed as a $5M cap in certain years). The PTET credit gets special treatment:

• FTB’s SB 132 bill analysis states the PTE credit “would not be subject to the $5 million credit limitation” for taxable years beginning on/after Jan 1, 2024 and before Jan 1, 2027.

• FTB’s Form 3804-CR instructions also explicitly state that for taxable years beginning on/after Jan 1, 2024 and before Jan 1, 2027, the $5,000,000 limitation on business credits “is not applicable” to the PTET credit.

Why owners care: when people are modeling 2026 outcomes, they often worry “will I even be able to use the credit?” This carve-out can improve the reliability of PTET benefits in that window.

6) Implementation checklist: what to do if you want PTET to actually deliver

If you advise or run a pass-through in CA, treat PTET like a recurring compliance workflow:

1. Decide early whether you’re electing for the year (don’t wait until return prep).

2. Build a June 15 control: calendar + approval + funding + confirmation receipt.

3. Pre-calc the June 15 minimum: 50% of last year’s elective tax or $1,000, whichever is greater.

4. Add a second control for the original return due date (no extension) to pay the balance.

5. If June 15 is missed/short, assume you’ll take a 12.5% credit haircut on the unpaid portion and communicate that to owners immediately.

California R&D Stack for 2026: New ASC-Style Research Credit + CA’s §174 Split From Federal

If you’re a CFO, founder, or controller in California, SB 711 quietly changed the “R&D math” in a way that can move real money. Starting with tax years beginning on/after Jan 1, 2025 (i.e., 2025 returns filed in 2026 for calendar-year filers), California modernized how you can calculate the state R&D credit—and California continues to diverge from federal treatment of R&D expenses under IRC §174.

The result: your federal R&D treatment may create California-only adjustments, and your California credit model may need a rebuild.

1) SB 711 modernizes the California R&D credit: ASC-style option is in

The big structural change: ASC-style method becomes available (AIRC goes away)

California historically forced many taxpayers into the traditional base calculation or the state’s alternative method. SB 711 moves California toward the Alternative Simplified Credit (ASC) concept (modeled on federal mechanics, but with California-specific rates).

At the same time, the FTB’s SB 711 bill analysis explicitly references the repeal of the Alternative Incremental Credit for the research credit.

The headline rates (California is lower than federal—by design)

SB 711’s modified ASC-style approach uses lower California percentages:

• 3% (general ASC rate), and

• 1.3% in the “no QREs in the prior three years” scenario (reduced rate).

Why this matters: the traditional approach can be a paperwork grind and can penalize newer companies that don’t have long historical data. ASC-style mechanics typically make the credit more accessible for startups and fast-growing teams that ramp spend quickly.

2) How the ASC-style calculation works (plain English)

At a high level, ASC-style crediting is based on recent-year spending, not decades of history.

The general concept:

• Start with your current-year Qualified Research Expenses (QREs).

• Compare them to a baseline derived from the average QREs for the prior three years.

• Credit applies to the amount that exceeds a threshold tied to that prior-year average.

If you had no QREs in any of the prior three years, a reduced rate applies.

A quick mental model (not a full computation)

• If your R&D spend is flat, your credit may be modest.

• If your R&D spend is growing, the ASC-style method generally performs better because it’s designed to reward incremental increases in QREs.

Translation: SB 711 pushes California toward a more “growth-friendly” way to compute the credit.

3) California’s §174 position stays split from federal (and it’s a big deal)

Here’s the part that creates the most confusion:

Federal (post-2021): capitalize and amortize §174

Federal law requires capitalization and amortization of research expenses (generally 5 years domestic / 15 years foreign) for tax years beginning after Dec 31, 2021.

California: does not conform to that federal change

The California Franchise Tax Board has been explicit: California has not conformed to the federal §174 change.

And they go further with the practical consequence:

• Because California does not conform, taxpayers may need state adjustments for federal/state differences tied to expensing vs. amortization.

• California taxpayers may continue to deduct §174 research expenses paid/incurred or elect to amortize over five years on the California return.

What this means operationally

If your tax team capitalized §174 federally, you can easily end up with:

• higher federal taxable income (because deductions are spread out), and

• lower California taxable income (because California may still allow a current deduction), plus

• ongoing tracking of multi-year state/federal differences.

This is where “we’ll clean it up at filing” turns into a messy, time-consuming reconciliation—especially if the R&D ledger isn’t clean.

4) The accounting angle: current tax vs. deferreds (why CFOs care)

Even if you’re not deep into ASC 740/ASC 740-10, the directional impact is straightforward:

Current tax

• California’s continued §174 nonconformity can reduce California current tax relative to federal (when federal forces capitalization).

Deferred taxes / provision

• Federal §174 capitalization creates future deductions over time.

• If California allows current deduction (or a different amortization approach), you can create state vs. federal timing differences that drive:

  • different deferred schedules

  • different effective tax rate movements

  • more reconciliation work at close

The credit model and the expense model are linked

SB 711 changes how you can compute the credit, while §174 drives how you treat the underlying spend (timing of deductions). If the spend isn’t categorized correctly into QRE buckets, you can:

• underclaim the credit,

• misstate current tax,

• or build an indefensible position in an exam.

5) Documentation: the fastest way to protect the credit and reduce audit friction

If you want this to be “finance-ready,” you need QRE support that can survive scrutiny. Minimum viable controls:

• Time tracking or substantiation for technical staff (even lightweight sampling beats nothing)

• A clear mapping of wages, supplies, and contractor costs into QRE categories

• Project narratives that connect activities to qualifying research (what uncertainty, what experimentation)

• A tie-out from the QRE study to the GL and tax return workpapers

This isn’t about overbuilding—this is about avoiding a last-minute scramble where everyone argues about what counts as “R&D” after the books are closed.

What to do now (2026 filing-season play)

1. Re-run your California R&D credit model under the new ASC-style option (don’t assume your old method is still optimal).

2. If you capitalized §174 federally, plan for California-only adjustments (and make sure the team can support them).

3. Build/refresh QRE documentation during the year, not after—because reconstruction is expensive and usually weaker.

Capex in CA After SB 711: Like-Kind Exchanges, §179 Limits, and Why Bonus Depreciation Still Doesn’t Show Up

California’s SB 711 moved the state’s general IRC conformity date forward, which reduces friction in a lot of places. But if you’re an asset-heavy business (construction, logistics, manufacturing, real estate, trades), the capex rules you care about are still a classic federal-vs-California split.

The outcome is predictable: federal assumptions can materially understate California taxable income and California cash tax. So if you’re planning a 2026 equipment refresh, you need to model CA separately.

1) Like-kind exchanges: California is aligned with the TCJA “real property only” direction

What business owners remember: “1031 lets me swap assets and defer the gain.”

What changed under TCJA (federal): For exchanges after Dec 31, 2017, §1031 is generally limited to real property (not held primarily for sale). That largely shuts down the old world where people tried to use like-kind treatment on certain personal property swaps.

Where California lands: California’s SB 711 analysis explains that California conforms to the federal real-property limitation for exchanges after Dec 31, 2017 (with state timing and historic individual-level qualifications), and SB 711 tightens California’s modified conformity approach by adding a sunset to those qualification rules.

Practical impact (what to tell clients):

• If you’re swapping equipment, vehicles, machinery, or other personal property, don’t plan on a California 1031 deferral.

• For real estate deals, 1031 remains a live planning tool, but you still need tight execution and documentation.

Action item: If a client’s deal team is talking about “doing it as a 1031,” confirm early whether it’s real property and whether California treatment matches the model—before agreements and closing timelines are locked.

2) Bonus depreciation: still not a California thing (and SB 711 didn’t change that)

Federal bonus depreciation is the “big lever” that lets businesses write off a large portion of eligible asset cost up front under IRC §168(k).

California explicitly does not conform to IRC §168(k). FTB’s depreciation guidance lists §168(k) as an area where California law does not conform.

So even when federal shows a huge first-year deduction, California usually requires you to depreciate the asset over time under California rules—which means:

• higher California taxable income in the year of purchase

• more California current tax than owners expect

• ongoing state/federal depreciation differences that have to be tracked

“But California has something called ‘additional first-year depreciation’…”

Yes—California has its own separate concept that is not federal bonus depreciation. The FTB 3885 instructions describe an election to deduct up to 20% of qualifying property in the year acquired, but it’s capped (the instructions note a maximum additional first-year depreciation deduction of $2,000) and comes with specific definitions and limitations.

Translation: for meaningful capex, California’s version is usually a rounding error compared to federal bonus depreciation.

3) §179 in California: the cap is still $25,000, and it phases out fast

Small businesses love §179 because it’s simple: “expense the equipment now.”

California allows §179—but under very different limits than federal.

FTB’s corporate depreciation instructions are blunt:

• Maximum CA §179 deduction: $25,000

• Phaseout threshold: the deduction is reduced if the cost of qualifying §179 property placed in service is more than $200,000

FTB also notes California does not allow the §179 election for off-the-shelf computer software.

Practical impact:

• If you place more than $200,000 of qualifying assets in service, your CA §179 starts getting squeezed.

• If you’re buying meaningful equipment (common for construction and manufacturing), the CA §179 benefit may be minimal—even when federal expensing is large.

What this means in the real world (simple example)

Scenario: a contractor buys and places into service $400,000 of equipment in 2026.

• Federal: could be heavily front-loaded through bonus depreciation and/or §179 (depending on federal rules and eligibility).

• California: no §168(k) bonus depreciation, and §179 is capped at $25,000 with a phaseout starting at $200,000—so California taxable income can be dramatically higher in year 1.

Translation for owners: “We got a big deduction federally, so we’re fine” can be the exact setup for an ugly California April payment.

The accounting/provision angle (why controllers care)

If you’re doing a tax provision or even a basic forecasting model:

• this creates a recurring state/federal depreciation difference

• it can drive deferred tax movements and state ETR volatility

• it increases the need for a clean, auditable state fixed asset rollforward

You don’t want to discover missing state depreciation schedules when you’re already under a filing deadline.

2026 Capex checklist (do this before you approve the spend)

1. Run a California cash-tax model separate from federal (don’t rely on blended rates).

2. Maintain a California fixed asset ledger (or ensure your CPA/tax software is doing it correctly).

3. Flag any plan that assumes bonus depreciation for California—because it won’t be there.

4. If you’re counting on §179 in California, sanity-check the $25,000 / $200,000 limits and whether the purchase mix still qualifies.

5. If anyone says “1031,” confirm it’s real property and confirm the state treatment before deal terms are final.

SB 711 Conformity: California Moved to IRC 1/1/2025: Here’s the 2026 Filing-Season Playbook

California finally “caught up” its general federal conformity date—but that doesn’t mean your California return will match your federal return. SB 711 is a big simplification move, yet plenty of high-dollar differences remain. The win is knowing where the gaps still are—before estimates, provisions, and returns go sideways.

The headline: California’s general conformity date moved to January 1, 2025

SB 711 (the “Conformity Act of 2025”) changes California’s general “specified date” of conformity from January 1, 2015 to January 1, 2025, generally for taxable years beginning on or after January 1, 2025.

Translation for most taxpayers: this impacts 2025 returns filed in 2026 (calendar-year filers). You’ll see fewer “California adjustment” surprises in some areas—but not all.

“Conformity” ≠ “same as federal”

California conforms to federal law with modifications, and the state makes selective “conform / modify / not conform” decisions. SB 711 itself explicitly describes broad conformity “except as otherwise provided.”

Practically, you should assume your federal numbers are the starting point, not the finish line.

Below are the most common, high-impact areas where California still diverges (and where returns and estimates blow up if you don’t plan).

The 5 California–federal gaps that still matter most

1) Bonus depreciation: still a “no” in California

Federal rules allow additional first-year depreciation under IRC §168(k) (including TCJA-era bonus depreciation). California does not conform—meaning you still need a separate CA depreciation schedule and ongoing state adjustments.

Practical impact: cash tax and book/tax timing differences persist. If you bought equipment or vehicles, expect California taxable income to be higher than federal in early years.

2) Section 179 expensing: California caps it at $25,000

Federal §179 is far more generous. California keeps a much lower cap—$25,000 with a phaseout that starts at $200,000 of qualifying property placed in service.

Practical impact: small businesses that rely on §179 to manage taxable income often discover late that California disallows most of the federal expensing.

3) QBI deduction (199A): California doesn’t allow it

California does not conform to the federal IRC §199A Qualified Business Income deduction for pass-through owners.

Practical impact: pass-through owners can have a clean federal benefit and zero California benefit—so California effective tax rates can be meaningfully higher than expected.

4) R&D (Section 174 capitalization): California doesn’t follow the federal capitalization rule

Federal law requires specified research and experimental costs (post-2021) to be capitalized and amortized. California does not conform.

Practical impact: if you capitalized/amortized §174 federally, you may need a California adjustment back to a current deduction, plus deferred tax/provision implications for many businesses.

5) Personal item example (because it trips real people): alimony treatment differs

Under TCJA, many post-2018 divorce agreements changed alimony inclusion/deduction. California does not conform to that federal change.

Practical impact: individuals with alimony may have mismatched federal vs. California income reporting—easy to miss, messy to fix after the fact.

The 2026 filing-season playbook (what to do now)

Step 1: Treat SB 711 as a process change, not just “new law”

SB 711 reduces friction—but it does not eliminate the need for California adjustments.

Step 2: Run a “CA vs. federal difference scan” before you finalize estimates

Focus on the five areas above first. If any apply:

• model CA taxable income separately

• validate fixed asset schedules

• flag pass-through owners expecting 199A

• review §174 handling and documentation

Step 3: Lock down the operational controls

• Fixed assets: maintain CA depreciation methods and lives where required; don’t assume your tax software “just handles it.”

• Entity owners: PT owners should expect CA taxable income to be higher than federal if 199A is material.

• R&D clients: align accounting/tax treatment and keep clean support files—this is a recurring audit zone.

Step 4: Don’t wait until the return “blows up”

Most California problems are not technical—they’re timing and documentation problems.

California Payroll + Employment Taxes 2026: The “Update Your System Today” Checklist

If you run payroll in California, 2026 is not a “set it and forget it” year. A few small-looking changes (especially deposit thresholds) can create real penalty exposure if your payroll system, provider, or internal controls aren’t updated before your first January payroll closes.

What changed on January 1, 2026 (and why you should care)

1) Minimum wage increased to $16.90/hour

California’s statewide minimum wage is now $16.90/hour (effective Jan 1, 2026).

Reality check: many cities/counties are higher, and California explicitly warns employers to check local ordinances.

2) Exempt salary floor increased to $70,304/year

For the classic “white-collar” exemptions, California ties the minimum salary requirement to twice the state minimum wage for full-time employment. DIR/Labor Commissioner explicitly states the 2026 minimum annual salary is $70,304.

Compliance risk: if someone is treated as exempt but paid below the threshold, you’ve got a misclassification problem (overtime, meal/rest premium exposure, etc.). This is a clean “audit finding” for plaintiffs’ counsel.

EDD 2026 rate landscape (budget + accrual implications)

EDD posted the 2026 payroll tax rates and the wage-limit mechanics. Here’s the operational takeaway:

Employer-paid taxes (P&L cost drivers)

• UI (Unemployment Insurance): 2026 rate schedule is Schedule F+ with rates ranging 1.5% to 6.2%, applied to the first $7,000 of wages per employee, per year. Your actual rate depends on your assigned UI rate (DE 2088).

• ETT (Employment Training Tax): 0.1% on the first $7,000 of wages per employee, per year.

Budgeting note: UI cost is not “flat.” It’s an employer-specific rate. EDD reminds employers to review DE 2088 and update payroll software/payroll agents so the right rate gets applied.

Employee withholdings you remit (cash + liability controls)

• SDI (includes PFL): employee withholding rate is 1.3% for 2026, and all wages are subject (no wage cap).

• CA PIT withholding: driven by EDD withholding schedules and the employee’s DE 4/W-4 elections. EDD hosts the 2026 schedules in two methods (A and B).

Accrual note: UI/ETT are employer expenses. SDI/PIT are employee withholdings but still create cash timing and remittance risk—your liability account needs to tie to actual deposits.

The sleeper issue: PIT deposit threshold drops to $400

EDD announced that beginning Jan 1, 2026, the California PIT deposit threshold changes to $400 from $500 for next-day and semi-weekly depositors.

This matters because deposit frequency is driven by:

• your federal deposit schedule, and

• your accumulated state PIT withheld (now measured against the new threshold).

Penalty exposure is not theoretical: EDD states late payroll tax payments can trigger a 15% penalty plus interest.

“Update Your System Today” Checklist (do this before the first 2026 payroll closes)

A) Wage + classification controls

• Update payroll system minimum wage floor to $16.90/hour (and confirm local wage overrides where applicable).

• Run an exempt salary audit: anyone under $70,304 gets flagged for immediate correction/reclassification review.

B) Rate tables + employer notices

• Pull your 2026 DE 2088 and update your UI rate in payroll software/provider settings.

• Confirm ETT is set to 0.1% and wage limit logic is $7,000 for UI/ETT.

• Confirm SDI withholding is set to 1.3% and no wage cap logic remains in place.

C) Withholding schedules (don’t wing it)

• Download and implement the 2026 CA withholding schedules (Method A or Method B) from EDD.

• Confirm onboarding uses DE 4 and your process handles employees who don’t submit it (default withholding rules).

D) Deposit cadence + cash controls

• Update internal controls for the $400 PIT threshold for next-day/semi-weekly deposit logic (and confirm your payroll provider actually implemented it).

• Add a January control: reconcile PIT/SDI liabilities to deposits after each payroll run (especially for high payroll weeks).

Quick “who should worry most” filter

You’re most exposed if you:

• run semi-weekly or next-day deposits already,

• have thin back-office controls (or multiple payroll streams),

• pay exempt staff close to the old threshold, or

• operate in multiple CA cities (local wages).

Small Print Alert: Don’t Miss Out on New OBBB Accounts and Benefits

There’s a lot of excitement around the One Big Beautiful Bill (OBBB)—from Trump Accounts to expanded child care credits and enhanced Opportunity Zones. But here’s what isn’t making headlines: Many of these new perks aren’t automatic. You have to “opt in,” file paperwork, or meet special reporting rules—or you could leave thousands on the table.

Let’s walk through what that fine print really means for you and your business.

1. Trump Accounts for Kids: The Opt-In Trap

• Not automatic: Employers (including SMB owners who employ family) must establish and offer Trump Accounts as part of their benefit plan.

• You need a plan document: Just like a 401(k), you’ll need to create a formal plan, notify eligible employees, and file paperwork.

• Annual opt-in required: Employees/parents must affirmatively elect to contribute each year—miss the window, and you miss the benefit.

• Bonus for newborns: The $1,000 government seed match also requires timely application—don’t wait until tax time!

• Reporting: You’ll need to track and report contributions and matches on W-2s and plan filings.

2. Child Care Credits & Dependent Care Accounts: Paperwork Matters

• Dependent Care Assistance Plans (DCAPs) & IRC §45F credits need plan documents in place before benefits are provided.

• Employers must notify employees (including your spouse, if on payroll!) of their eligibility and terms.

• Reporting: DCAPs and child care credits require extra forms with your return.
  Miss the reporting, miss the credit—even if you paid for care!

3. Opportunity Zones: Certification and Elections

• Not a default: To claim Opportunity Zone (OZ) benefits, you must invest through a Qualified Opportunity Fund (QOF)—which requires IRS Form 8996 and annual reporting.

• Certification needed: Starting your own QOF? You must self-certify and file on time, or your investment may not qualify.

• 5-year, 10-year, and 30-year elections: Each OZ tax benefit (deferral, basis step-up, permanent exclusion) requires a specific election—often with strict windows and forms.

• State conformity: Some states may have extra requirements or not follow federal OZ rules—check before you invest.

What Happens If You Miss the Window?

• You lose the benefit. These are “use it or lose it” perks—there’s often no way to get them retroactively if you miss an election or deadline.

• Potential penalties. Improper or late filings can trigger penalties or audits, especially for employer plans and OZ funds.

Bottom Line

Big new accounts and credits = big new paperwork.
Don’t let fine print or missed deadlines steal your tax savings—if in doubt, reach out to your accountant or let Hedgi keep your compliance on track.

The OBBB Phaseout Cliff: Why Smart Timing Can Make or Break Your Biggest Tax Breaks

You’ve read the headlines—SALT cap raised! Tip income is tax-free! Trump Accounts for kids! But here’s what the headlines forget to mention: Most of the juiciest new tax breaks in the One Big Beautiful Bill (OBBB) phase out or disappear completely once your income passes a certain threshold. Sometimes it’s not a gentle slope—it’s a sudden drop-off.

Let’s talk about these “cliffs,” who needs to worry, and how you can plan to capture every dollar in savings.

The Biggest OBBB Tax Breaks With Income Phaseouts

Some of the most valuable new deductions and credits get smaller—or vanish—if your adjusted gross income (AGI) is too high:

• SALT Cap:
  Up to $40,000 deduction—but phases out after $500,000 AGI (married filing jointly).

• Tip Exclusion:
  Up to $25,000 in tax-free tips per worker—but phases out at $150,000 (single) or $300,000 (MFJ).

• Child Care Credits/Trump Accounts/EITC/Opportunity Zones:
  All have similar phaseouts or income “cliffs.”

• R&D Credits and Some Business Write-Offs:
  Certain phaseouts for larger or high-income businesses.

What’s a “Cliff” and Why Does It Matter?

A phaseout is when your deduction or credit gradually shrinks as your income goes up.
A cliff is when you lose the whole thing in one step—ouch.

That means a few thousand dollars of extra income could cost you tens of thousands in lost tax breaks.

Example:

• Make $495,000 MFJ? Get the full $40K SALT deduction.

• Make $501,000? Sorry, it’s gone.

• Tip exclusion? Hit $151K single? Poof.

How to Plan Around Phaseouts (and Keep More in Your Pocket)

1. “Bunch” Deductions and Expenses

• If you’re close to a phaseout threshold, try to accelerate deductible expenses into one year (or defer income to another) to keep your AGI low enough to qualify.

• Example: Prepay property taxes, stack business purchases, or defer a client payment into next year.

2. Spread Out Income Strategically

• Time bonuses, capital gains, or big sales over two years if you’re bumping up against a cliff.

• Example: Delay invoicing or postpone a property sale until January.

3. Watch Entity Choices and Payroll

• S-Corp owners: Review W-2 vs. K-1 distributions to control AGI.

• Partnerships: Consider how guaranteed payments, draws, or pass-through income show up on your return.

4. Use Retirement Plans to Lower AGI

• Max out 401(k) or SEP IRA contributions to reduce AGI and qualify for more credits.

Bottom Line: A Little Planning Goes a Long Way

The new law gives out huge tax breaks—but only if you stay under the line.
If you’re close to a phaseout, a few small moves can make a big difference in your after-tax cash.

Want help running phaseout scenarios, or not sure how to “bunch” expenses the right way? Drop a question below or DM Hedgi—let’s make sure you don’t slip off the cliff!

Home-Based Business Deductions: What’s New (and What’s Actually Deductible) Under OBBB

Working from home is here to stay—and the new One Big Beautiful Bill (OBBB) just made it even better for small business owners and side hustlers who want to claim more for their space, improvements, and even that “she-shed” in the backyard.

If you’ve ever wondered, “Can I deduct this?”—read on for the latest (plus a few funny scenarios you might not have considered).

What’s Actually Changed?

The OBBB clarifies and expands home office deductions for 2025 and beyond (see OBBB §70421 and related IRS guidance):

• Wider definition of “home office improvements”:
  You can now expense (under Section 179 or bonus depreciation) more improvements to your home workspace—including certain HVAC, security, lighting, and built-in tech upgrades.

• Detached structures count:
  Sheds, garages, studios—if used exclusively and regularly for your business, they qualify for the deduction.

• Utility deductions clarified:
  You can now claim a broader range of “business portion” utilities—including some smart home systems, internet upgrades, and even energy used for production or video shoots.

• Hybrid and multi-use rules are clearer:
  The IRS and Treasury will release guidance on how to allocate costs for spaces used partly for business and partly personal, but the rules remain strict about “exclusive and regular use.”

What’s Deductible Now? Funny (But Real) Scenarios

1. The Home Gym—Deductible?

Maybe! If you film fitness videos for your business, and the gym space is used exclusively for content creation (no personal sets or family treadmill runs), you can deduct a portion of improvements and utilities.
If it doubles as your actual gym: Sorry, still not deductible!

2. The She-Shed or Backyard Office

Yes, if used 100% for business!
Install a prefab office shed, run your consulting, art, or e-commerce biz from there? Deduct construction, improvements, utilities, and equipment (based on exclusive business use and proper allocation).
Just don’t store lawnmowers or host backyard BBQs in there—keep it all business.

3. The Guest Room/Office Hybrid

Partial deduction.
You can only deduct the portion of the room used exclusively for business.
If you set up a desk in a guest room, you’ll need to measure square footage and allocate expenses (and, as always, keep records).

4. Smart Home Tech & Utilities

Deductible if used for business!
If you install a second Wi-Fi router or extra power for production lights, and it’s only for your home-based business, that’s a legitimate expense.

Hedgi’s Home Office Deduction Tips

• Document everything: Take photos of your space, keep invoices, and save energy bills.

• Use Hedgi to tag and track expenses: Assign categories for improvements, utilities, and supplies right from your transactions.

• Be honest: The IRS loves a good audit story, but hates creative fiction. “Exclusive and regular use” means just that.

• Consult a pro: Still not sure? Your CPA or Hedgi can help you get it right.

Bottom Line

With the OBBB, home-based business owners can write off more than ever—but only if you play by the rules. If you’re building your dream office, filming workouts, or running the next big Etsy shop from your she-shed, it pays to know what’s really deductible.

Questions about your unique space, or want a checklist of what to claim? Drop a comment or message Hedgi—no deduction left behind!

Basis Matters: New S Corporation & Partnership Rules Under OBBB (And Why SMB Owners Need to Pay Attention)

Let’s talk “basis”—not the kind in bananas, but the tax kind that determines whether you can deduct losses, take out cash, or make big tax moves in your business.
Thanks to the One Big Beautiful Bill (OBBB), the rules just changed for S Corporations and partnerships. Here’s what every SMB owner (and their accountant) needs to know.

What Is “Basis” and Why Does It Matter?

• Basis is your running investment in your business for tax purposes.

• It goes up when you put in cash or assets, and down when you take out money or deduct losses.

• Why it matters: If you don’t have enough basis, you can’t deduct losses—or take cash out tax-free.
  (Cue the sad trombone—and a possible surprise tax bill.)

What Did the OBBB Change? (With Citations)

OBBB Section 70451–70453 (amending IRC §§ 1366, 1367, 1368 for S Corps, and §§ 704, 705, 752 for partnerships)

Key changes effective for tax years after December 31, 2025:

1. Tighter Rules for Loans to S Corporations

• Old law: Shareholders could “increase basis” by lending money directly to their S-Corp—sometimes even with backdated or informal loans.

• New law ([OBBB §70451–70453, amending IRC §1366(d)]):

  • Only bona fide, properly documented loans increase basis.

  • “Back-to-back” or “arranged” loans (like borrowing money elsewhere and funneling it to the S-Corp for a basis bump) now require strict proof and timely paperwork.

  • Trap: No more boosting basis just before year-end to deduct losses—paperwork and timing matter!

2. Partnership Liabilities: Who’s Really “At Risk”?

• Old law: Partners could sometimes count partnership-level (or even related-party) loans toward their own basis.

• New law ([OBBB §70452, amending IRC §§704, 705, 752]):

  • Only debts for which you’re personally liable count toward basis, unless you can show true economic risk.

  • Related-party loans and guarantees: Must now meet stricter IRS standards—sham or circular loans don’t cut it.

3. Clearer At-Risk Rules for Losses and Distributions

• OBBB amends the “at-risk” provisions ([OBBB §70453, amending IRC §465]):

  • Losses and distributions must be traced to genuine investment and risk—no more creative accounting to squeeze out more deductions.

  • Distributions that exceed your basis? Now more likely to trigger taxable gain.

What Does This Mean for SMB Owners?

• Track your basis every year—no more “fudge it at tax time.”

• Formalize loans: If you lend money to your S-Corp or partnership, use real, signed promissory notes, with terms and proof of payments.

• Be honest about guarantees and at-risk: Only true, out-of-pocket risk boosts your basis.

• Don’t try “basis boosts” with last-minute or circular loans—the IRS is watching (and the penalties are real).

• If your basis is low, you may be limited on deductions and can owe tax on distributions—even if you’re just taking out your own money!

Common Pitfalls

• Taking a distribution that exceeds your basis (now more likely to trigger tax).

• Deducting more losses than you’re allowed (leading to IRS letters or denied refunds).

• Not tracking basis for each shareholder or partner—everyone’s number is different!

Bottom Line: Basis Isn’t Boring (It’s Your Ticket to Big Tax Savings)

The new OBBB basis rules are strict—but with clear records and a modern app like Hedgi, you’ll avoid trouble and keep more of what you earn.

Have a tricky basis situation, a loan to your business, or just want a “basis checkup”? Drop a question or DM us. Don’t get caught out in the cold when it’s time to take a distribution—let Hedgi keep you tax-savvy and audit-ready!

No Tax on Overtime: Why This Popular Tax Break Isn’t So Simple (Especially in California)

If you’re an employee or small business owner in California, you’ve seen the headlines:
“No Tax on Overtime!”
President Trump’s new overtime tax break is supposed to save workers up to $90 billion through 2028, and payroll companies are shouting it from the rooftops.

But here’s the catch:
The fine print is real—and if you’re in California, it’s even trickier than most headlines admit.

Let’s break it down so you actually know what qualifies (and what doesn’t).

How Does the Overtime Tax Break Work?

Here’s the big idea:

• For tax years 2025–2028, if you earn overtime covered by the federal Fair Labor Standards Act (FLSA), you don’t pay federal income tax on the extra “half” of your time-and-a-half pay.

• This is a big deal for millions of hourly employees putting in real overtime.

The Catch: Only Federal Overtime Qualifies

Here’s where it gets sticky for Californians:

• Only overtime required by the federal FLSA qualifies for the tax break.

• This does NOT include:

  • Airline, railroad, or some transportation jobs (they follow separate rules)

  • Overtime paid just because of state laws (like California’s rule where OT starts after 8 hours/day)

  • Exempt workers or those on special employment contracts

Translation:
If you earn overtime because California says so (e.g., after 8 hours in a day but not 40 in a week), that pay doesn’t qualify for the no-tax treatment.
Only the “federal” portion counts—not the California-mandated OT.

Why Is It So Complicated?

Lawmakers tied this deduction to FLSA overtime because:

• It’s a well-known, standardized definition.

• It limits the tax break to what Congress intended (and doesn’t bust the federal budget).

Result:
You—and your payroll provider—now have to track two types of overtime:

• What you pay overall (per California law)

• What actually counts for the federal tax break

For now, Form W-2 won’t break it out. You’ll need detailed payroll statements when you file your 2025 taxes.

California Employees: Double-Check Your Paystubs!

If you’re in California:

• You may get overtime for daily hours and weekly hours, but only the federal portion is tax-free.

• Employers will eventually need to break out which amounts qualify on your pay stub or payroll report.

Don’t assume all your OT is tax-exempt!
Keep your records, and check with your CPA if you’re not sure.

Bottom Line

The “no tax on overtime” provision is a huge win for many, but it’s not as simple as the headlines suggest—especially in California. Know what qualifies, keep solid records, and check your math before you celebrate that refund.

OBBB Strategy: Generational QSBS Gifting

With the 2025 tax reform officially supercharging Qualified Small Business Stock (QSBS), founders and investors now have a golden window to build generational wealth — tax-free.

If you’re holding early-stage stock in a C-Corp, especially if it qualifies as QSBS under the new law, now is the time to think long-term: Who else in your family should hold some of this tax-free rocket fuel?

The Play: Gift QSBS Early. Stack the Exclusions. Build a Dynasty.

The updated law (Section 1202, post-OBBB) lets each taxpayer exclude up to $15 million in QSBS gains per company, indexed for inflation. That means:

• You get $15M

• Your spouse gets $15M

• Your kids each get $15M

• Your irrevocable grantor trusts each get $15M

…all with the same stock.

Gifting QSBS Transfers the Holding Period, Not the Cap

Here's the kicker: when you gift QSBS, the holding period carries over to the recipient (e.g., your child, spouse, or trust)… but they get their own lifetime $15M gain exclusion.

So if you’ve held the stock for 2 years, and you gift it to your 18-year-old daughter today, she only has to wait another 3 years to unlock the 50% exclusion at 3 years, 75% at 4, or 100% at 5 — and she gets her own $15M exclusion on that same company.

Build the Stack: Family + Trusts = Mega Exclusions

Let’s say you’re the founder of a fast-growing tech startup and your QSBS is currently worth $1/share.

If you gift 2M shares now (FMV = $2M) to each of the following:

• Your spouse

• Two kids

• Two intentionally defective grantor trusts (IDGTs)

They each get their own $15M cap, plus your holding period. If the company exits at $10/share, the $20M gain in each account could be 100% tax-free.

That’s $120 million in tax-free gains, legally — just by planning ahead.

Add Valuation Discounts for Gifting Efficiency

When gifting to family or trusts:

• Use valuation discounts (e.g., lack of marketability or minority interest) to reduce gift tax exposure

• File a protective Form 709 gift tax return to lock in the valuation

This allows you to transfer more equity with less estate/gift tax impact, while preserving the QSBS status.

Sample Scenario

Emma, a startup founder, owns 5M QSBS shares currently worth $1M (pre-raise).

She gifts:

• 1M shares to her spouse

• 500k each to two kids

• 1M each to two IDGTs

Her holding period is 2 years.

Total tax-free gain: $45M+
(Far more if value grows and they hold longer)

Timing Matters

To qualify for the new $15M cap and accelerated timeline (3–5 years), you must acquire the stock after the law’s enactment (2025).

Already have older QSBS? You still get the original $10M exclusion — but that’s stackable too.

Bottom Line

This strategy is a powerful combo of:

• QSBS gain exclusion

• Gift and estate tax planning

• Family wealth transfer

• Startup equity optimization

It’s one of the most efficient, legal, and future-focused tax plays available right now.

Want to Run the Numbers?

We help founders:

• Audit their cap tables for QSBS eligibility

• Structure gifts to family and trusts

• Coordinate with legal and valuation teams

• File the right forms to preserve benefits

Let’s talk about how your equity today can unlock tax-free wealth for generations.

OBBB Strategy: Your Spare Room Might Be the Most Valuable Part of Your Business

How S-Corp Owners Can Turn a Home Office Into a Powerful Tax Strategy

Thanks to the One Big Beautiful Bill, real estate-heavy tax strategies are back in the spotlight — and that includes your home office. If you're an S-Corp owner who works from home and owns your residence, there's now a powerful way to structure things to your advantage.

The Strategy in a Nutshell

Instead of just taking the standard home office deduction, S-Corp owners can formalize a lease between themselves (personally) and their business, and then layer multiple deductions on top of that arrangement.

Here’s how it works:

Create a Written Lease Agreement

Your S-Corp rents a portion of your home — say, a dedicated office or workspace — under a legitimate lease.

• Must be reasonable market rent

• Documented in writing

• Must reflect exclusive and regular use for business

This converts a nondeductible personal expense into a legitimate business rent deduction for the S-Corp.

Improve the Space — Then Deduct It

With the lease in place, your S-Corp can make improvements to the rented portion of your home — and deduct them under the updated Section 179 rules or 100% bonus depreciation.

Eligible improvements include:

• HVAC upgrades

• Electrical rewiring

• Built-in furniture

• Lighting

• Security systems

• Fire alarms

• Data cabling

Under the new law:

• Section 179 now includes qualified real property (roofs, HVAC, etc.) and is indexed for inflation

• Bonus depreciation is back at 100% for 2025 — allowing full expensing of eligible improvements

Result: Your S-Corp gets a massive deduction today while you improve your home workspace.

Collect Rent on Your Personal Return

You report rental income personally — but here's the twist:

• The rent is not subject to self-employment tax

• You can offset that income with depreciation and expenses from the leased portion

• Improvements made by the S-Corp increase your home’s basis, potentially avoiding capital gains down the road

Use Cost Segregation to Accelerate Personal Deductions

If you're already doing improvements or have significant home equity:

• Do a cost segregation study on your residence

• Separate structural vs. personal property and improvements

• Depreciate certain components faster (e.g., 5- or 15-year property)

You may be able to use bonus depreciation on qualifying parts of your home — even if it’s partially personal-use — depending on how the lease and space allocation are structured.

Why It Works Now (Post-OBBB)

The 2025 tax law turbocharged this strategy by:

• Expanding Section 179 to more types of real property

• Making 100% bonus depreciation permanent

• Keeping S-Corp rents between related parties deductible (when documented correctly)

Important Caveats

• The leased space must be exclusive and regular use — no dual-use rooms

• The lease must be arms-length and fair market rent

• Improvements should be clearly for business use

• S-Corp should avoid triggering self-rental recharacterization if you’re a real estate pro

Example

Jacob owns his home and runs Schwartz & Schwartz from a dedicated 300 sq. ft. office.

• His S-Corp signs a lease for $1,000/month

• The S-Corp installs a $12,000 HVAC split system and $5,000 in built-ins

• It deducts $17,000 in Section 179 improvements and $12,000 in rental expense

• Jacob reports $12,000 in rental income — but takes $7,000 in depreciation and $3,000 in expense offsets

Net result: The S-Corp gets $29,000 in deductions. Jacob nets only $2,000 in personal income, taxed at favorable rates.

Bottom Line

If you’re a small business owner working from home, don’t just take the standard home office deduction. Under the new tax law, your spare room could become a tax-saving machine — when structured properly.

Want to explore how to set this up in your own business? We can help with:

• Lease templates

• Rent valuation

• Capital improvement planning

• Hedgi AI categorization + cost seg prep

OBBB Strategy: How to Deduct Foreign Development — Even If It Doesn’t Qualify for R&D Expensing

A smart workaround for tech founders with offshore teams

The Problem: Not All R&D Is Created Equal

Under the One Big Beautiful Bill, U.S. companies can now fully expense qualified domestic R&D under new IRC §174A — but there’s a catch: Only R&D performed inside the U.S. qualifies for this immediate deduction.

That means if you're using offshore developers — say in Ukraine, India, or Latin America — those wages don’t qualify for §174 expensing, even if the work is mission-critical.

The Strategy: License Back the IP, Deduct the Fees

Here’s how smart founders are getting around it:

Step 1: Set up an offshore subsidiary

• The entity employs your foreign dev team

• It owns the code or IP initially created abroad

• It charges your U.S. company a licensing fee or cost-plus development fee

Step 2: Your U.S. C-Corp licenses the software

• The U.S. entity uses or resells the foreign-developed product

• License payments or royalties are deductible business expenses

• Even though you can’t expense the offshore dev wages under §174, you still get a write-off

Step 3: Optimize the structure

• Use arm’s-length transfer pricing

• Ensure proper IP assignment and use agreements

• Consider leveraging a cost-sharing agreement if future IP will be co-developed

💡 Example

Let’s say your startup:

• Has a Delaware C-Corp as the main company

• Employs 5 developers in Romania through a wholly owned subsidiary

• Generates revenue in the U.S. from a SaaS platform built by that team

Under the OBBB:

• You can’t expense Romanian dev wages under §174A

• But if the Romanian entity licenses the software back to the U.S. C-Corp…

• The U.S. company can deduct $300,000+ per year in license or royalty fees

You’ve effectively turned a non-deductible R&D cost into a deductible operating expense.

Key Legal + Tax Considerations

• You must document your intercompany pricing and IP rights clearly

• Be ready to produce transfer pricing documentation if audited

• Local tax compliance (e.g. Romania, India) is still required

• Consider treaty implications and potential withholding taxes on cross-border payments

If structured correctly, this setup is fully legal, tax-efficient, and increasingly common in global software development.

Who Should Consider This?

This strategy is ideal if you’re:

• A startup or SaaS company with overseas dev teams

• A U.S. C-Corp planning to license or commercialize products built abroad

• Already using Upwork, Toptal, or offshore contractors and want to move to a structured entity

• Working with VCs who expect clean IP rights and compliant tax positioning

Combine With Domestic R&D Expensing

Your U.S.-based engineers still qualify for §174 expensing — and may trigger R&D credits under §41.

The goal: Fully expense U.S. R&D, deduct foreign dev through royalties or licensing — and document everything to stay compliant.

Want Help Structuring It?

We help founders:

• Build compliant offshore subs

• Draft intercompany license agreements

• Layer this with §174 expensing and QSBS eligibility

• Optimize global tax positioning

This isn’t just a tax loophole — it’s a global growth strategy under the new tax law.