I think I understand where the confusion is coming from. A lot of tax software and accountants don't explicitly show you the basis calculations on your tax return, they just handle it behind the scenes. So when you look at your 1040 with Schedule E, you're seeing the profits as ordinary income, but any potential capital gains from distributions exceeding basis would show up elsewhere (likely on Schedule D). If you've never exceeded your basis with distributions, you've never seen this in action.

This thread has been incredibly helpful! I've been struggling with the same confusion about S-Corp taxation for months. One thing that really clicked for me from reading these explanations is that the IRS treats S-Corp profits and distributions as completely separate tax events. The profits flow through and get taxed as ordinary income regardless of whether you take any money out. Then distributions are a separate calculation based on your basis. I think the confusion comes from other business structures where profits and distributions are more directly connected. In a regular C-Corp, you'd have corporate tax on profits, then personal tax on dividends. In partnerships, distributions can sometimes affect the tax treatment. But S-Corps have this unique pass-through system where the profit taxation happens whether you distribute or not. For anyone else reading this thread, I'd recommend keeping a simple spreadsheet tracking your basis year by year. Start with your initial investment, add annual profits and additional contributions, subtract distributions and losses. This makes it much easier to see when distributions might exceed basis and trigger capital gains treatment. Thanks everyone for the detailed explanations - this has saved me from making some expensive mistakes on my tax return!

Has anyone considered that charitable miles are only deductible at 14 cents per mile? That's WAY less than the standard business mileage rate (65.5 cents for 2023). With gas prices and everything else, you might be better off just taking an actual donation and getting a receipt.

One thing to consider is the "but for" test that the IRS sometimes applies to volunteer expenses. Essentially, would you be getting this sailing instructor certification "but for" your volunteer work? Since you mentioned this is ONLY for volunteering and you have no plans to use it professionally or for personal benefit, that strengthens your case significantly. However, I'd recommend documenting your intent thoroughly. Keep records showing that you researched this training specifically because the organization required it, not because you were interested in sailing instruction generally. Screenshots of their volunteer requirements, emails about the position, etc. could all be helpful. Also worth noting that even if the training itself is questionable, your travel expenses (mileage, meals, lodging) for getting to the training should be more clearly deductible since they're directly related to your volunteer service. The 14 cents per mile adds up on a 400-mile round trip, plus you can deduct 50% of your meals while traveling for charitable purposes. Keep detailed records of everything - dates, purposes, receipts, and correspondence with the organization. Good documentation is your best protection.

I'm going through the exact same situation right now! Just got my certified mail notification yesterday and have been checking my online account obsessively with zero results showing up. This thread has been such a lifesaver for my anxiety - it's incredibly reassuring to see how common this system disconnect actually is. From reading everyone's experiences, it seems like the vast majority of these certified letters are routine verification requests rather than the catastrophic scenarios our minds immediately jump to. Whether it's education credits, income verification, or simple corrections, most people here resolved their issues with a quick phone call and maybe uploading a document or two. The fact that so many of you had the same experience with nothing appearing in your online accounts until weeks or even months later really highlights how outdated their system integration is. It's honestly mind-boggling that in 2025, the IRS still operates like their digital and physical systems are in completely separate universes! I'm definitely going to follow everyone's advice and pick up my letter tomorrow morning instead of letting fear and speculation drive me crazy. The anticipation and unknown are clearly the worst parts of this whole process. Thank you all for sharing your stories - knowing that I'm not alone in this experience and that most of these situations have straightforward resolutions is helping me feel so much more prepared to handle whatever this turns out to be. I'll make sure to update once I know what it's about!

I've been following this thread and wanted to add my perspective as someone who received a certified letter just last month. Like everyone else here, absolutely nothing showed up in my online account beforehand - it's honestly reassuring to see how universal this experience is! Mine turned out to be verification for the American Opportunity Tax Credit from my senior year. They just needed me to confirm that I was enrolled at least half-time during one of the semesters I claimed the credit for. I had to upload my official transcript through their secure portal, which took about 5 minutes once I figured out how to access it. The whole thing was resolved within a week, but here's the kicker - my online account STILL doesn't show any record of this correspondence, even though I have email confirmations that everything was processed and approved. It's like their systems exist in parallel dimensions! For those of you picking up letters tomorrow, my advice is to have your phone ready to take pictures of everything for your records, and if you need to call, try to do it early in the morning when wait times are typically shorter. Also, if the letter mentions any specific forms or documents they need, gather those first before calling - it'll make the conversation much smoother. The anticipation really is the worst part. Once you know what you're dealing with, it becomes just another administrative task rather than this scary unknown. You've all got this!

Does anyone have experience using QuickBooks for tracking S-Corp distributions vs retained earnings? Their reporting seems confusing for this specific situation.

Just wanted to add another perspective on the retained earnings documentation piece. I've been running my S-Corp for 5 years and learned this the hard way - make sure you're documenting the business purpose for retaining earnings in your corporate minutes or resolutions. The IRS likes to see that retained earnings serve a legitimate business purpose (like saving for equipment purchases, building emergency reserves, or funding expansion plans). I keep quarterly board resolutions (even though I'm the only member) explaining why we're retaining earnings and what they'll be used for. My CPA said this kind of documentation can be really helpful if you're ever questioned about why profits weren't distributed. Also, don't forget that even though you'll pay income tax on the profits whether you take them or not, keeping money in the business does give you more flexibility for future tax planning strategies. You can time distributions in years when your personal tax situation might be more favorable.

This is exactly why I always recommend people get fee estimates IN WRITING before any tax prep work begins. Most legitimate preparers will provide a written estimate based on your forms and complexity level. The fact that they didn't disclose their $575 fee upfront is a red flag. To add to what others have said about getting your documents back - if you're still having trouble, you can also contact your state's Attorney General's office. Many states have specific consumer protection laws regarding tax preparation services, and they take document retention issues very seriously. I've seen AG offices get involved and resolve these situations within 24 hours. Also, for future reference, never let a tax preparer start work without a signed engagement letter that clearly outlines fees, services, and your rights regarding your documents. Any reputable preparer should be happy to provide this.

I work at a state consumer protection office and see cases like this frequently. What your tax preparer is doing is definitely not legal and violates consumer protection laws in most states. They cannot hold your original documents hostage to force payment for services you haven't agreed to purchase. Here's my recommended escalation path: 1. Return to the office and ask to speak with the manager/owner (not just the preparer) 2. Clearly state that you are declining their services and need your original documents returned immediately 3. If they refuse, inform them you'll be filing complaints within 24 hours with multiple agencies The magic phrase to use is: "I am formally requesting the return of my personal property. These documents belong to me, not your business." Most tax offices will cave immediately when they realize you know your rights and are willing to escalate. They make money on volume, not on fighting individual battles. The bad publicity and regulatory scrutiny from complaints costs them far more than your $425 fee. If you need help identifying the right consumer protection office in your state, feel free to ask - I can point you in the right direction.