This entire discussion has been incredibly valuable! As someone who frequently uses local small businesses for everything from custom cakes to handmade crafts, I've encountered this exact scenario multiple times and never fully understood the implications until now. What really stands out to me is how this practice creates risks for everyone involved - businesses expose themselves to tax compliance issues and potential payment processor account closures, while customers lose buyer protections and potentially participate in misrepresenting transaction types. The 2% processing fee that businesses are trying to avoid is negligible compared to potential IRS penalties of up to 20% plus interest. I love the collaborative solutions that have emerged from this discussion. Rather than simply avoiding businesses that request friends & family payments, offering to cover processing fees or suggesting compliant alternatives shows genuine support while maintaining ethical boundaries. This approach turns what could be an uncomfortable confrontation into a constructive conversation that benefits both parties. For anyone dealing with similar situations, the three-step approach that's been outlined seems perfect: have a supportive conversation about compliance risks, offer practical alternatives like covering fees or using different payment methods, and use their response as an indicator of their overall approach to business ethics. Moving forward, I'm definitely going to implement this strategy with local businesses I want to support. Most small business owners probably don't fully understand these compliance risks and would appreciate customers who care enough to help them operate properly.

This discussion has been incredibly thorough and educational! As a newcomer to this community, I'm impressed by how everyone has balanced supporting small businesses with maintaining proper tax compliance. What really strikes me is how this situation puts customers in an uncomfortable ethical position. We want to support local businesses we love, but we shouldn't have to choose between that support and following tax laws or maintaining our consumer protections. The bakery is essentially asking customers to help them avoid both Venmo fees and IRS reporting requirements, which creates liability for everyone involved. I particularly appreciate the collaborative solutions that have emerged here - especially the idea of offering to cover processing fees or suggesting alternatives like cash payments. This transforms what could be an awkward confrontation into a supportive conversation that helps the business stay compliant while maintaining the customer relationship. The point about home-based food businesses having substantial tax deductions available is crucial. Many small business owners focus so intensely on avoiding the immediate 2% processing fee that they miss much larger deduction opportunities that could more than offset those costs. A conversation with a tax professional might reveal that they're actually losing money by trying to avoid proper business payment processing. For situations like this, I think the key is approaching business owners as an ally rather than an adversary. Most are probably unaware of the compliance risks they're creating and would genuinely appreciate customers who care enough to help them operate legally and sustainably.

Anyone know if leasing is better than buying for tax purposes? I've heard conflicting things.

One thing I don't see mentioned here is the importance of proper business purpose documentation. I made the mistake of thinking a basic mileage log was enough, but during an audit the IRS wanted to see detailed records of WHY each trip was business-related, not just where I went. For Section 179 vehicle deductions, you need to be extra careful about proving legitimate business use. I started keeping a simple voice memo app on my phone to record the business purpose of each trip right when it happens - "visiting client Johnson to review quarterly reports" or "picking up supplies for the Peterson project." Takes 5 seconds but creates a contemporaneous record that's much more defensible than trying to recreate it later. Also, don't forget that if you're using the vehicle for both business and personal use, you need to track EVERYTHING - not just the business trips. The IRS will want to see your total mileage to verify your business use percentage is accurate.

Don't forget about state taxes in all of this! Some states have their own additional self-employment taxes or different rules for retirement plan contributions. I made this mistake a few years ago and ended up with a surprise state tax bill because I only focused on federal tax planning.

This is exactly the kind of complex tax situation where having all the details straight is crucial. Based on what everyone has shared, it sounds like your brother is in a good position to significantly reduce his tax burden through the Solo 401k strategy. One additional consideration - since he's dealing with both severance income and new consulting income, make sure to factor in the timing of when the consulting payments were actually received versus earned for cash accounting purposes. If some of the $168,750 was invoiced but not yet received by year-end, that could affect both his self-employment tax calculations and his available contribution room for the Solo 401k. Also, with that level of income, he might want to consider whether a SEP-IRA could be more advantageous than a Solo 401k in his specific situation. While Solo 401k generally offers more flexibility, the administrative requirements can be more complex, especially if he's planning to continue growing his consulting business. The advice above about getting direct IRS clarification is spot on - with this much money involved and the complexity of mixed income sources, having official confirmation of the calculations could save him from costly mistakes down the road.

Has anyone used multiple crypto tax software programs to compare results? I tried three different ones and got wildly different numbers for the same transactions. Kinda concerning.

I went through a similar nightmare situation with years of unfiled crypto taxes. One thing I learned the hard way is to tackle this systematically rather than trying to fix everything at once. Start with your most recent tax year first (2023) since that's what you need to file soon. Get that sorted with proper crypto tax software, then work backwards. This approach helps you understand the process before diving into the messier historical data. For the older years, focus on the big transactions first - don't stress about every $5 trade from 2017. The IRS cares more about substantial unreported income than minor discrepancies. If you're missing some transaction data from defunct exchanges, document what you tried to recover and use reasonable estimates based on what you can reconstruct. Also consider consulting with a tax professional who specializes in crypto - the cost might be worth it given the complexity of your situation and the potential penalties involved. They can help you determine which years actually need amended returns and guide you through any voluntary disclosure programs if applicable. The most important thing is that you're taking action now rather than continuing to ignore it. The IRS generally works with taxpayers who are making good faith efforts to get compliant.

Just to add another perspective - I made the mistake of NOT reporting personal credit card payments for my LLC formation on Form 5472 last year. Ended up getting a notice from the IRS requesting additional information. Has anyone used tax software for Form 5472 preparation? Most regular tax software doesn't seem to handle these foreign-owned DE situations well.

I'm dealing with a very similar situation right now with my foreign-owned single-member LLC. Based on what I've researched and the helpful responses here, it seems clear that formation costs paid with personal funds should definitely be reported on Form 5472 Part V as contributions. One thing I'm curious about - when you report these formation costs as contributions, do you need to include the exact dollar amount of each individual expense (registered agent fee, state filing fee, etc.) or can you report them as a single lump sum contribution? I had several different formation-related expenses totaling about $1,200. Also, regarding the foreign income question - I'm in a similar boat where my LLC doesn't conduct any U.S. business activities. From everything I've read, it sounds like we're only required to file the pro forma 1120 with mostly zeros and focus on properly completing Form 5472 for the reportable transactions between us (foreign owners) and our U.S. entities. The complexity of these international tax requirements is really overwhelming for first-time filers like us!