We’ve heard from numerous tax professionals who are frustrated because many of the final business entity tax forms are still not available through their tax software provider. This is not a universal issue with all tax software providers, because we have heard from other tax professionals that they have been able to access final forms through their providers. The final FTB forms are also available on the FTB’s website.

When we reached out to the FTB, we were informed that taxpayers can e-file forms with a watermark. A watermark only indicates that the form has not yet been approved for paper filing. However, we recognize that some software products will not allow professionals to print forms that are watermarked, which prevents clients from reviewing their complete tax returns.

The taxing agencies (IRS, FTB, and others) create the forms and set parameters for software developers to recreate the forms and set e-file standards. The reason why one software developer may have a particular form available before another provider is a matter of the software provider managing resources, such as the number of developers and which forms the software company prioritizes.

Sign up for Spidell’s 2026 Post-Tax Season Update and Review webinar to review, refresh, and arm yourself to tackle extensions. Click here and register today.

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The IRC §168(n) special depreciation deduction for qualified production property allows taxpayers to claim a 100% depreciation allowance for certain real property placed in service after July 4, 2025, and before January 1, 2031. Eligible property must be used in qualified production activity and meet other specified criteria.

New taxpayer-friendly guidance issued by the IRS, which may be relied upon while proposed regulations are promulgated, provides clarity to many unanswered questions regarding this new deduction. (IRS Notice 2026-16)

Highlights of the guidance clarify that:

• To qualify, the property (or portion of the property) must be an integral part of a qualified production activity, defined as at least 95% of the property’s space is used in the activity;
• Improvements and additions made to existing property can be treated as qualified production property;
• Lessors are generally not eligible to claim the deduction, but an exception is available if the lessor and lessee are under common control or members of a consolidated group;
• Taxpayers can designate on an election the entire unadjusted depreciable basis of eligible property as qualified production property or a designated specific dollar amount (up to the amount of the property’s unadjusted basis); and
• For the 2025 tax year only, taxpayers can establish that they are engaged in a qualified activity if the principal business activity code that the taxpayer lists on its 2025 federal income tax return is any of the NAICS codes listed under sectors 31, 32, or 33, or under subsectors 111 or 112, that appear in the 2022 North American Industry Classification System (NAICS) Manual (2022).

The guidance provides numerous examples of the concepts listed above, and outlines how a taxpayer makes the election to claim the deduction and when and how the deduction is subject to recapture.

Sign up for Spidell’s 2026 Post-Tax Season Update and Review webinar to review, refresh, and arm yourself to tackle extensions. Click here and register today.

The Governor has announced that the state is expanding its CalAssist Mortgage Relief Program to provide up to one year (previously three months) of mortgage assistance grants, up to $100,000 (previously $20,000). The state has also increased the income limits that residents must meet to qualify for the program (e.g., up to $70,000 higher for taxpayers in Los Angeles County).

Residents who previously received three months of assistance will be offered additional support, bringing total assistance to a full year.

To qualify for the grants:

• The applicant’s primary residence must have been destroyed as a result of a qualified California disaster that occurred between January 1, 2023, and January 8, 2025;
• The applicant must meet specified income limits;
• The applicant must only own one residential property; and
• The property must be an eligible property, which includes a single-family home, condo, or permanently affixed manufactured home.

Applications are free and submitted online. The funds are paid directly to mortgage servicers and never have to be repaid.

Additional information is available at:

www.calhfa.ca.gov/calassist/index.htm

Sign up for Spidell’s 2026 Post-Tax Season Update and Review webinar to review, refresh, and arm yourself to tackle extensions. Click here and register today.

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We have received numerous inquiries from tax professionals alerting us that the Form 1040-ES mailing address for payments had been changed for certain taxpayers in the 2026 instructions. We reached out to the IRS for clarification because no announcement had been made. Since that time, the IRS has removed the 2026 Form 1040-ES from their website.

We’ve been informed by the IRS that taxpayers and tax professionals should use the addresses listed on the following IRS webpages for the appropriate mailing address depending on the state in which the taxpayer is located:

www.irs.gov/filing/where-to-file-paper-tax-returns-with-or-without-a-payment
www.irs.gov/filing/where-to-file-addresses-for-taxpayers-and-tax-professionals-filing-form-1040-es

If payments were made to the wrong address, the IRS will forward the payments to the correct address. However, this is an important reminder that taxpayers should always send payments to the IRS through certified mail. This is also another reason to encourage clients to make payments electronically, to avoid these mailing address concerns.

Sign up for Spidell’s 2026 Post-Tax Season Update and Review webinar to review, refresh, and arm yourself to tackle extensions. Click here and register today.

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According to the updated 2026 Lapsed Appropriations Contingency Plan, IRS operations will continue to be fully funded for the first five days of a government shutdown.

The IRS will continue to fund their operations with appropriations remaining from the Inflation Reduction Act. This means there will be little to no impact on IRS operations from the government shutdown for these initial five days as filing season gets underway.

The Contingency Plan also outlines identifies which functions may continue beyond day five. However, if a shutdown is prolonged, disruptions are possible. When the government shut down for 43 days in late 2025, the IRS furloughed almost half of its workforce and paused most operations, including taxpayer call sites.

We will continue to keep you posted as news develops.

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The FTB’s network access has been restored and systems are currently back online.

Due to the network outage, the FTB is experiencing a higher volume of calls and is encouraging taxpayers and tax professionals to use MyFTB or online services to address their issues if possible.

Sign up for Spidell’s 2026 Post-Tax Season Update and Review webinar to review, refresh, and arm yourself to tackle extensions. Click here and register today.

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The FTB has notified Spidell that their systems are currently down. They have stated that this does not appear to be a security-related issue.

However, FTB staff will not be able to assist taxpayers or tax professionals while their systems are down because they will be unable to access taxpayer information.

We will send another Flash E-mail when their systems are back up.

Sign up for Spidell’s 2026 Post-Tax Season Update and Review webinar to review, refresh, and arm yourself to tackle extensions. Click here and register today.

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The IRS has announced that Monday, January 26, 2026, is the opening day of the 2026 income tax filing season. This is the date when the IRS officially begins accepting and processing 2025 federal income tax returns. The California Franchise Tax Board is already accepting e-filed returns.

Tax returns filed early in the filing season are generally processed faster, so filing easier returns as early as possible will help keep the filing season as smooth as possible. However, just because filing season opens on January 26 does not mean that all forms and schedules will be available by that date. Be sure to check with your software provider for release dates for any forms that are not available.

With the passage of the One Big, Beautiful Bill Act (OBBBA), the 2026 filing season contains many changes from last year. Be sure to attend Spidell’s Federal and California Tax Update webinar for a complete rundown of all the changes you need to know, including:

• The IRS’s phaseout of paper refund checks (but not payments … yet);
• How to open Trump accounts and elect federal government seed money for newborns;
• OBBBA’s new tax provisions as well as those provisions that were extended by OBBBA;
• Form updates; and
• Many more changes that occurred in 2025.

Sign up for Spidell’s 2025/2026 Federal and California Tax Update webinar and get information on the most important issues facing your practice. Click here and register today.

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President Trump has signed the Disaster Related Extension of Deadlines Act (HR 1491), which makes two key changes for disaster victims. The act:

• Extends the statute of limitations period for disaster victims to file a refund claim; and
• Prohibits the IRS from mailing a payment due notice to disaster victims until 60 days after the disaster postponement period.

Federal law allows taxpayers to file a refund claim within three years from the time the taxpayer’s return was filed or two years from the time the tax was paid, whichever expires later. However, the amount that may be refunded is limited to the amount of tax paid within the statutory lookback period. The lookback period for taxpayers who file a refund claim within three years of filing the taxpayer’s return is equal to three years plus the period of any extension of time for claiming the return. Otherwise, the lookback period is two years.

Under prior law, disaster postponements were not treated as an “extension,” so even though taxpayers were granted postponements to pay the tax, the lookback period was not extended to include the disaster postponement period. This frequently resulted in taxpayers being unable to claim excess withholding or estimated tax payments which were deemed paid as of the original due date, without regard to the postponement period.

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Proposed regulations clarify the eligibility requirements for the new IRC §163(h)(4) deduction for interest paid on qualified passenger loan vehicles purchased for personal use that is available for the 2025 through 2028 tax years. (REG-113515-25) The deduction is capped at $10,000 annually and is subject to phaseout for taxpayers with modified AGI above $150,000 ($250,000 MFJ). One of the requirements for the deduction is that the original use of the vehicle must commence with the taxpayer.

Highlights of the proposed regulations clarify that:

• Only an individual, decedent’s estate, nongrantor trust, or disregarded entity (e.g., nongrantor trust or SMLLC) owned by one of these taxpayers can claim the deduction (assuming the other requirements are met);
• The personal use requirement is met if at the time of purchase the taxpayer estimates that the vehicle will be used more than 50% of the time for personal use. Taxpayers do not have to reevaluate the personal use requirement in subsequent years. For disregarded entities the determination is made at the owner level, and for estates and trusts this is determined based on the expected use by the heirs or beneficiaries;
• A taxpayer that uses a vehicle partially for business use can choose to deduct the interest as a business expense, but must reduce the auto loan interest deduction claimed on Schedule 1-A by the amount of business interest claimed;
• The $10,000 limit applies per return, so MFJ filers are limited to a $10,000 deduction, while taxpayers who file MFS would be entitled to up to $10,000 per spouse;
• Interest attributable to amounts directly related to the purchase of the vehicle (e.g., vehicle service plans, extended warranties, sales taxes, and vehicle-related fees) qualifies for the deduction; and
• Although interest paid on refinanced loans qualifies for the deduction, the deduction is limited to interest paid on the outstanding balance of the refinanced loan as of the date of the refinancing.

The proposed regulations also outline the reporting requirements for lenders, but lenders were given transitional relief for the 2025 tax year. (IRS Notice 2025-57) See our October 21, 2025, Flash E-mail for details.

Sign up for Spidell’s 2025/2026 Federal and California Tax Update webinar and get information on the most important issues facing your practice. Click here and register today.

Beginning January 1, 2026, the standard mileage rates for the use of a car, van, pickup truck, or panel truck are:

• 72.5 cents per mile driven for business use, up 2.5 cents from 2025;
• 20.5 cents per mile driven for medical purposes, down 0.5 cents from 2025;
• 20.5 cents per mile for moving purposes for qualified active-duty members of the Armed Forces and intelligence community, down 0.5 cents from 2025; and
• 14 cents per mile driven in service of charitable organizations, unchanged from 2025.
  (IRS Notice 2026-10)

The rates apply to fully electric and hybrid vehicles, as well as gasoline and diesel-powered vehicles.

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President Trump issued an Executive Order directing the Attorney General to take all necessary steps to complete the rulemaking process related to rescheduling cannabis from a Schedule I drug to a Schedule III drug under the Controlled Substances Act (CSA).

Rescheduling cannabis as a Schedule III drug is significant for taxpayers involved in the cannabis industry because under IRC §280E businesses trafficking in Schedule I or II drugs under the CSA cannot claim any business-related deductions or credits, except cost of goods sold.

It’s important to recognize that the Executive Order does not, in and of itself, reclassify cannabis as a Schedule III drug. The Attorney General’s office must issue regulations to complete the reclassification process, which likely wouldn’t happen until sometime during the 2026 calendar year.

Despite reclassification as a Schedule III drug, cannabis would remain illegal at the federal level, so it’s unlikely that the reclassification would open up more banking opportunities to cannabis businesses.

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New guidance regarding Trump accounts, which were enacted by the One Big, Beautiful Bill Act (OBBBA), has been issued by the IRS. (IRS Notice 2025-68) These accounts are essentially traditional IRA-type accounts established for U.S. citizen children under the age of 18. However, there are different rules as to what and how much can be contributed, and most distributions are prohibited until the year the child turns 18.

The guidance includes information concerning how the accounts are established, how contributions are made, when distributions are allowed, and reporting requirements.

This Flash E-mail focuses on the big question being asked by practitioners: “How do you set up a Trump account?” Additional information is included in the guidance, and will be covered in our tax update webinars and seminars, as well as the upcoming issue of Spidell’s Federal Taxletter^®.

Establishing the account

An initial account for an eligible child can only be established by the Treasury Department after an authorized individual (e.g., legal guardian, parent, etc., referred to as the “responsible party”) makes an election to do so.

The election to establish a Trump account will be made on IRS Form 4547, Trump Account Election(s) (yet to be released), or through an online tool or application. Form 4547 can be filed with a taxpayer’s 2025 tax return. The online tool/application will be available sometime in mid-2026. Remember that accounts cannot begin to take contributions until July 4, 2026.

The account can be established at the time the responsible party makes an election to accept the $1,000 pilot program contribution or at any time prior to the calendar year in which the child turns 18. Pilot program contributions are available only to children born in 2025 through 2028 and can only be claimed if elected by the taxpayer claiming the child as a dependent.

The initial Trump account will be held in one or more financial institutions to be chosen by the Treasury Department. Once a Trump account is established, the responsible party may make a qualified rollover contribution into another Trump account maintained by a bank or other qualified nonbank authorized to maintain IRA accounts (e.g., Fidelity, Vanguard, etc.). The entire account must be rolled over. Partial rollovers are not allowed. This means only one Trump account can be funded for an individual at any time.

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The Internal Revenue Service Math and Taxpayer Help Act (MATH Act; H.R. 998), which requires that the IRS provide specific information when it makes a tax return change due to a math or clerical error, was signed by President Trump on November 25, 2025. Previously, when the IRS made a change to a taxpayer’s return due to a math or clerical error, the IRS could just make the change without providing much, if any, information to the taxpayer.

Pursuant to the MATH Act, a notice sent by the IRS containing changes due to a math or clerical error must include:

• A clear description of the error, including the type of error and the tax return line where the error was made;
• An itemized computation of adjustments that are required to correct the error;
• The phone number for the IRS’s automated transcript service; and
• The deadline for requesting an abatement of any penalties as a result of the error.

The MATH Act was supported by many professional tax organizations, including the AICPA.

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Today, the IRS issued guidance and transitional relief for individual taxpayers to calculate the new OBBBA deductions for qualified tips and overtime. (Notice 2025-69) This guidance follows the guidance previously issued via IR-2025-82 and Notice 2025-62, which provided similar information for employers and issuers of Forms 1099. All of this special guidance and transition relief is required for taxpayers to be able to claim these deductions, because the IRS did not update 2025 Forms W-2 or 1099 to account for these new OBBBA deductions.

For employees claiming the deduction for qualified tips under IRC §224, qualified tips can be calculated by using the total amount of:

• Social Security tips reported on their Form W-2, box 7;
• Tips reported by the employee to the employer on all Forms 4070, Employee’s Report of Tips to Employer (or any similar substitute form); or
• Cash tips reported on Form W-2, box 14 (or on a separate statement) if the employer voluntarily reports this information.

In addition to the three methods above, an employee can also include any amount listed on line 4 of Form 4137, Social Security and Medicare Tax On Unreported Tip Income, filed with the employee’s 2025 income tax return.

Self-employed taxpayers can calculate their qualified tips through either:

• A separate statement provided by a 1099 issuer (because 2025 Forms 1099 were not modified to separately report qualified tips); or
• Using earning statements or other documentation such as receipts, point-of-sale system reports, daily tip logs, third-party settlement organization records, or other documentary evidence, but only for those amounts that are actually included on a 1099.

The IRS has also created a transition period regarding the determination of whether qualified tips were received by a specified service trade or business (SSTB). At least for the 2025 tax year, the IRS will treat all employees who receive tips as if the tips were received in a non-SSTB. This will provide much welcome relief, especially for performing artists who typically received tips but may be ineligible for the tip deduction because of the SSTB determination. Forthcoming regulations should provide clearer guidance for performing artists and other taxpayers who are unsure whether they are an SSTB.

Notice 2025-69 similarly provides simple, alternate methods of calculating qualified overtime for those taxpayers whose employers do not provide a separate statement with Fair Labor Standards Act (FLSA) qualified overtime for 2025. The methods are too numerous to list, but the IRS has provided examples in the notice to help guide taxpayers and tax professionals through each of the different calculation methods. There is nothing in the guidance addressing overtime for the self-employed, but there is guidance on special FLSA overtime rules for certain workers such as firefighters, public safety officers, certain other government employees, and hospital and certain residential facility workers.

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The 2026 inflation-adjusted Medicare amounts have been announced. (U.S. Centers for Medicare and Medicaid Services Fact Sheet) For those with modified AGI of less than $109,000 ($218,000 MFJ), the Part B monthly premium amount will be $202.90. For those with modified AGI greater than $500,000 ($750,000 MFJ) the Part B monthly premium amount will be $689.90.

These changes represents a 9.7% increase from 2025 Medicare Part B premiums.

For charts of the premiums for all modified AGI levels for 2026 and 2025, go to:

www.spidell.com/files/2025/medicare.pdf

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Because California borrowed close to $18 billion in 2020 from the federal government to pay unemployment benefits during the COVID-19 pandemic and has yet to pay it off, employers face an additional 0.3% credit rate reduction (a.k.a. rate increase) for 2025, which will be paid by employers in 2026. This means for the 2025 tax year, paid in 2026, most employers will pay a FUTA rate of 1.8% per employee up to the $7,000 wage base.

This results in $126 maximum per employee, which is $84 more than they would pay without the FUTA credit reduction.

The good news, however, is that the potential 3.7% additional rate hike that was under consideration because California’s loan has been outstanding for more than five years will not go into effect. The federal government approved California’s waiver request on November 10, 2025, meaning the FUTA rate will remain at 1.8% for 2025.

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Inflation-adjusted retirement figures for 2026 have been announced by the IRS in Notice 2025-67. Key adjustments contained in the notice include, but are not limited to:

• The IRA contribution limit and catch-up contribution limit is increased from $7,000 to $7,500 and from $1,000 to $1,100, respectively. Also included in the Notice are the increased income phase-out ranges;
• The SIMPLE contribution limit for businesses with 25 or more employees is increased from $16,500 to $17,000, while the catch-up contribution amount for most employees age 50 and older is increased from $3,500 to $4,000 ($5,250 for employees aged 60, 61, 62, or 63). For businesses with fewer than 26 employees, the contribution limit is increased from $17,600 to $18,100 and the general catch-up contribution limit remains at $3,850;
• The annual contribution limit for IRC §§401(k), 403(b), 457 governmental plans, and the federal government’s Thrift Savings Plan is increased from $23,500 to $24,500, and the catch-up contribution limit for most employees 50 and older is increased from $7,500 to $8,000. However, employees aged 60, 61, 62, and 63 can make a catch-up contribution of up to $11,250; and
• The qualified charitable distribution limit is increased from $108,000 to $111,000.

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Early today, the IRS issued Notice 2025-62, which provides transition relief for issuers of Forms W-2, 1099-NEC, 1099-MISC, and 1099-K with respect to mandatory reporting of tip and overtime compensation under the One Big, Beautiful Bill Act (OBBBA). The transition relief is available for the 2025 taxable year only.

The notice provides that employers and other payors will not face penalties for failing to provide a separate accounting of any amounts reasonably designated as overtime compensation, cash tips, or the occupation of the person receiving cash tips.

The IRS previously announced that it would not be updating its 2025 Forms W-2, 1099-NEC, 1099-MISC, or 1099-K, so today’s transition relief is expected. Recently, however, the IRS released draft versions of these forms for the 2026 taxable year containing new lines for tips and overtime reporting.

The IRS encourages employers and other payors to provide employees and other payees with a separate accounting of tips, overtime compensation, and tipped occupation codes if they are able to. However, this is not required to receive the penalty relief provided in Notice 2025-62. The IRS suggests that employers and other payors provide this information through an online portal, additional written statements provided to the payee, or by using Form W-2, Box 14 in the case of employees.

Obviously missing from Notice 2025-62 is any guidance aimed for payees regarding claiming the qualified tips deduction or the qualified overtime deduction in the absence of information provided by an employer or payor.

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The EDD has informed Spidell that due to inflation adjustments, beginning January 1, 2026, the California personal income tax deposit (PIT) threshold will be reduced from $500 to $400 for next-day and semi-weekly deposits. A taxpayer’s deposit schedule (e.g., next-day, semi-weekly, etc.) is based on the taxpayer’s federal deposit schedule, but the threshold amounts are determined by the EDD based on California law.

For a chart summarizing the California payroll deposit requirements for both 2025 and 2026, go to:

www.spidell.com/files/2025/cadepositrequirements.pdf

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The IRS announced today that PTIN renewals for the 2026 tax season are now open. The renewal fee is $18.75. (IR-2025-108)

Taxpayers can renew their PTINs at:

http://rpr.irs.gov/ptin

Starting this year, the IRS’s PTIN system now uses the ID.me secure sign-in process. Tax professionals who have a Social Security number will automatically be routed to ID.me for identify verification.

Anyone who prepares or assists in preparing federal tax returns or claims for refunds for compensation must have a valid PTIN and must include it on all returns and claims filed with the IRS.

Additionally, all Enrolled Agents, regardless of whether they prepare tax returns, must renew their PTINs annually to maintain their active status.

PTINs expire on December 31 of the calendar year for which they are issued, so tax professionals must renew their PTIN by December 31, 2025.

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The CalAssist Mortgage Fund Program, which provides qualified disaster victims with grants of up to three months of mortgage payments (capped at $20,000), has increased its income eligibility limits. Households in Los Angeles County can now qualify if they have household income of up to $211,050 (a $70,000 increase).

To qualify for the grants:

• The applicant’s primary residence must have been destroyed as a result of a qualified California disaster that occurred between January 1, 2023, and January 8, 2025;
• The applicant must meet specified income limits; and
• The property must be an eligible property, which includes a single-family home, condo, or permanently affixed manufactured home.

Applications are free and submitted online. The funds are paid directly to mortgage servicers and never have to be repaid.

Additional information is available at:

www.calhfa.ca.gov/calassist/index.htm

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During the government shutdown, taxpayers are still required to meet filing and payment deadlines, but refunds will only be issued to individual taxpayers (and only if the return is filed electronically and is error-free, and the refund is direct deposited), according to a statement) released by the IRS on October 21, 2025. All tax deadlines remain in effect, and the IRS will continue to process electronically filed returns. Paper returns won’t be processed until full government operations resume, although checks sent in with these returns will be deposited.

The IRS will generally not be responding to taxpayer correspondence during the shutdown and will not be processing applications or determinations for tax-exempt status or pension plans.

Also closed during the shutdown are the:

• Taxpayer Assistance Centers;
• Taxpayer Advocate Services; and
• Independent Office of Appeals.

The following services are open during the shutdown:

• Limited IRS telephone customer service (automated telephone applications are still open);
• Automated tools that provide transcript services and full-service transcript services for disaster victims only;
• Testing and preparation activities for the 2026 filing season;
• IRS Income Verification Express Service (a.k.a. IVES); and
• Criminal investigation activities.

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The IRS announced anticipated transition relief guidance for both lenders and borrowers regarding the new below-the-line, non-itemized car loan interest deduction enacted by OBBBA. (IRS Notice 2025-57) This notice follows on the heels of the IRS releasing draft Form 1098-VLI, Vehicle Loan Interest Statement, on October 16, 2025.

Under this new provision, lenders have an information reporting requirement similar to the requirement for mortgage lenders to provide Form 1098, Mortgage Interest Statement, to borrowers by January 31 of the following tax year. The new Form 1098-VLI, must be issued if the taxpayer pays at least $600 in qualifying interest during the calendar year.

Because the IRS has only recently issued new Form 1098-VLI in draft form, Notice 2025-57 treats 2025 as a transition year and provides that lenders have met their reporting obligation for interest received on a qualified passenger car loan in 2025 if they make a statement available to the buyer indicating the total amount of interest received during 2025. Lenders can provide the statement via:

• An online portal that the buyer can easily access;
• A regular monthly statement;
• An annual statement that is provided to the buyer; or
• Any other similar means.

For individual taxpayers seeking to claim the new deduction for car loan interest, they can rely on the lender-provided information when claiming the deduction, even without receiving Form 1098-VLI.

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The IRS has released inflation adjustment figures for over 60 tax provisions, including the 2026 tax rate tables. (Rev. Proc. 2025-32) Other key adjustment figures include:

• Standard deduction: Increased to $32,200 for married filing joint (MFJ); $24,150 HOH; and $16,100 for single and married filing separate (MFS) taxpayers;
• Annual gift tax exclusion: The annual gift tax exclusion will remain $19,000;
• IRC §179 current expense limitations: The dollar limit is increased to $2,560,000 and the investment limit is increased to $4,090,000;
• IRC §199A threshold and phase-in range amounts: The threshold is increased to $201,750 ($403,500 MFJ; $201,775 MFS). The phase-in range amount is also increased to $276,750 ($553,500 MFJ; $276,775 MFS); and
• Excess business loss threshold: As a result of OBBBA’s resetting of the inflation amounts, the threshold is decreased beginning with the 2026 tax year to $256,000 ($512,000 MFJ).

The retirement-related inflation adjustment figures are not included in Rev. Proc. 2025-32. These are announced separately, usually in November.

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In the latest IRS Lapsed Appropriations Contingency Plan released by the U.S. Treasury that went into effect today, October 8, 2025, the Treasury stated that only 39,870 IRS employees (53.6% of total employees) will continue to work during the government shutdown. These employees will be covered through resources other than annual appropriations. This plan will remain in effect for five business days and may be adjusted thereafter as needed.

Below are some of the key functions that will continue during the shutdown:

• Completion and testing of the upcoming filing year programs;
• Implementing OBBBA (P.L. 119-21);
• Processing remittances;
• Processing disaster relief transcripts;
• Mail processing (remittances, etc.);
• Continuing the IRS’s computer operations to prevent the loss of data;
• Protection of statute expiration, bankruptcy, liens, and seizure cases;
• Upcoming tax year forms design and printing; and
• Income verification express service (IVES) and revenue and income verification service (RAIVS) photocopy programs.

Conversely, here are some of the key functions that will cease during the shutdown:

• Processing non-disaster relief transcripts;
• Non-automated collections;
• Taxpayer services such as responding to taxpayer questions (call sites during non-filing season), except for certain call site services accepting calls routed through FEMA;
• Information systems functions (except as necessary to prevent loss of data in process and revenue collections); and
• Planning, research, training, and development activities (except as necessary to perform excepted activities, e.g., filing season).

The Taxpayer Advocate Services has also announced on its website that all of their offices are closed and that no staff is available to assist taxpayers.

We will send another Flash E-mail if any additional changes related to the government shutdown are announced.

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The Federal Disaster Tax Relief Act (FDTRA; P.L. 118-148) authorizes an exclusion of qualified wildfire disaster relief payments paid to an individual taxpayer, retroactive to the 2020 tax year. The FDTRA gives taxpayers until December 12, 2025, to file a refund claim for closed tax years. However, prior to the update in the Internal Revenue Manual, it was unclear how taxpayers should claim this retroactive relief. (See the link to new IRM 21.6.6.2.48 below.)

The IRM states that taxpayers should file Form 1040-X to claim a retroactive exclusion. The wildfire that pertains to their claim must be notated at the top of paper returns and in Part II, Explanation of Changes, of Form 1040-X. For electronically filed returns, a PDF file titled with the applicable Wildfire Disaster must be attached. See the FEMA website for a list of all federally declared disasters.

We have heard from at least one tax professional who filed Form 1040-X for a prior tax year that the IRS disallowed the exclusion because the taxpayer did not file Form 4684, Casualties and Thefts, along with Form 1040-X even though there was no loss claimed. However, the IRM does not require that Form 4684 be filed with Form 1040-X. Should the IRS request a Form 4684 when there is no loss to report, we recommend that you cite the IRM.

Also, according to the IRM, nontaxable payments are not included on Form 1040, even if Form 1099-MISC was issued.

Qualified wildfire relief payments

The exclusion applies to any qualified wildfire relief payment received by an individual during the 2020 through 2025 taxable years that is related to a federal disaster (as defined by IRC §165(i)(5)(A)) declared after 2014 as a result of any forest or range fire. (FDTRA §3(d))

A “qualified wildfire relief payment” is any amount received by or on behalf of an individual as compensation for losses, expenses, or damages. (FDTRA §3(b)) Nontaxable payments include compensation for:

• Additional living expenses;
• Lost wages (other than compensation for lost wages paid by the employer that would have otherwise paid such wages);
• Personal injury or death; or
• Emotional distress.

IRM 21.6.6.2.48 is available at:

www.irs.gov/irm/part21/irm_21-006-006r

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The Governor has signed SB 711, which means California will conform to the Internal Revenue Code as in effect on January 1, 2025 (previously January 1, 2015), with some significant exceptions, generally effective beginning with the 2025 tax year.

While this brings California into conformity with many of the Internal Revenue Code provisions enacted in the last 10 years, California will not conform to any of the changes made by OBBBA, most of the provisions enacted by the TCJA, or many of the federal disaster bills enacted over the last few years.

We will be covering all the details concerning this legislation and the new adjustments that will be required on the California return beginning with the 2025 tax year in upcoming issues of the California Taxletter and at our Federal and California Tax Update seminars and webinars.

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According to the 2026 Lapsed Appropriations Contingency Plan released by the IRS today, IRS operations would continue to be fully funded for the initial five days of a government shutdown.

The IRS would continue to fund their operations with appropriations remaining from the Inflation Reduction Act even if the government shutdown goes into effect tomorrow. This means there will be little to no impact on IRS operations from the government shutdown for these initial five days as we near the October 15 filing deadline.

We will send another Flash E-mail should this change.

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Paper refund checks for individual taxpayers will be phased out beginning on September 30, 2025. (IR-2025-94)

This latest announcement by the IRS is the first step in implementing President Trump’s Executive Order 14274, which directed the U.S. Treasury to stop issuing paper checks by September 30, 2025, as well as mandating all payments to the federal government be made electronically “as soon as practicable.”).

According to the news release, for those who are unable to receive direct deposits to a bank account, other options such as prepaid debit cards, digital wallets, or limited exceptions to the paper check prohibition will be available. However, no additional guidance has been provided yet as to how these alternatives may be requested.

To date, there are no changes being made to how payments to the U.S. Treasury should be made. Taxpayers should continue to use existing payment options until further notice. According to the IRS, additional guidance and information for filing 2025 taxes will be issued prior to the 2026 filing season.

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Individuals who are experiencing financial hardship that prevents them from making timely payments on a residential mortgage loan due directly to the Los Angeles County wildfire disaster may now apply to their mortgage servicer for up to one year in mortgage forbearance. This is a result of changes made by AB 238 (Ch. 25-128), which the Governor signed on September 22.

Taxpayers may apply for forbearance in 90-day increments, for up to one year in total. The one-year total includes any forbearance that a mortgage servicer may have already provided prior to AB 238’s enactment.

During the forbearance period, the mortgage servicer cannot charge late fees, nor a default rate of interest. Additionally, for borrowers who were current on their mortgage loan prior to entering into a forbearance agreement, the servicer cannot require a lump sum payment after the forbearance period ends.

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Proposed regulations for the new tips deduction under IRC §224, which include the mandated list of close to 70 occupations that customarily and regularly received tips on or before December 31, 2024, have been released by the IRS. (REG-110032-25) This qualified occupations list and accompanying Treasury tipped occupation codes mirror the draft list that was previously released, although some of the occupation codes have been changed.

In addition to the list of occupations that qualify for the deduction, the proposed regulations clarify:

• What is treated as a “cash tip;”
• When a tip is considered voluntary, with some surprising distinctions when electronic handheld point of sale (POS) devices are used;
• Which tips qualify when tips are reported pursuant to a Tipped Rate Determination Agreement or Gaming Industry Tip Compliance Agreement;
• Tips paid for services performed in an illegal activity (e.g., unlicensed bartender, prostitution) do not qualify for the deduction, nor do tips received by an employee or other service provider who has an ownership interest in or is employed by the tip payor; and
• Because performing artists are an IRC §199A specified service trade or business (SSTB), tips paid to performing artists such as comedians or musicians operating a SSBT do not qualify for the deduction, but they will qualify if the performing artist is working as an employee (e.g., a piano bar player working in a hotel).

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The California Legislature has passed SB 711, which would update California’s current specified conformity date from January 1, 2015, to January 1, 2025. The bill will now be sent to the Governor’s office. We will update you when the bill is signed into law.

As previously reported in an earlier Flash E-mail, while SB 711 will conform to some of the federal law provisions contained in federal legislation passed within this 10-year period such as TCJA, the SECURE and SECURE 2.0 Acts, etc., California will continue to not conform to many of these provisions. In addition, because the One Big, Beautiful Bill Act (OBBBA) was passed after January 1, 2025, California will not conform to the provisions contained in OBBBA.

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Spidell is aware of erroneous notices CP161, Notice of Balance Due, and CP504B, Notice of Intent to Levy, issued by the IRS. According to one IRS stakeholder liaison we have spoken with, as of right now these erroneous notices are impacting taxpayers filing Form 1041 and the Form 1120 series. The IRS is working on this issue and is planning an external communication on the issue soon.

We recommend that taxpayers who receive either a CP161 or CP504B in error call the IRS and request a hold on collection activities. When calling the IRS, reference “SERP Alert 25A0128” issued on May 2, 2025. That alert indicated that the IRS’s estimated tax penalty system incorrectly calculated penalties for many taxpayers.

We will send another Flash E-mail as soon as the IRS has issued its official communication on the matter.

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The FTB has adopted changes to California’s apportionment sales factor market-based sourcing regulation, effective for taxable years beginning on or after January 1, 2026. (18 Cal. Code Regs. §25136-2) These changes will significantly impact most multistate taxpayers with California customers, whether the taxpayer is located inside or outside California.

Some of the most significant changes include:

• Revamping the rules for sourcing revenues from services to provide one set of cascading rules for sourcing sales to both individuals and businesses, rather than separate rules, and providing clarity as to how these rules are applied;
• A new rule for sourcing sales of professional services, which includes, among other services, investment advisory services (other than asset management services) and tax and payroll and accounting services. Taxpayers who provide services to more than 250 customers in any single professional service can source the revenue from those services to each customer’s billing address. However, different rules apply to receipts from customers who generate more than 5% of the taxpayer’s receipts;
• Specific sourcing rules for revenues from asset management services other than those asset management services already covered under 18 Cal. Code Regs. §25137-14 (which addresses mutual fund service providers);
• A new rule as to how to source revenues from a sale when the sale involves both sales of services and property or sales of both tangible and intangible property; and
• Clarifying rules for sales of intangible property, including marketable securities.

The revised regulation includes additional examples to illustrate how these rules are applied.

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