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One thing to consider that nobody's mentioned yet - even if you're treating it as hobby income for federal purposes, collecting and remitting sales tax creates a paper trail. Make sure your hobby vs. business classification is consistent across all your documentation. I've seen people get flagged for audit when they file sales tax as a business but report the income as a hobby on federal returns, or vice versa. The IRS looks at nine factors to determine if something is a hobby or business - including whether you conduct the activity in a businesslike manner, your expertise, time and effort invested, expectation of asset appreciation, success in similar activities, history of income/losses, occasional profits, your financial status, and elements of personal pleasure.
Does registering for a sales tax permit automatically make the IRS consider it a business? My state requires permits for even occasional sales at craft fairs, but I definitely don't make a profit on my quilting hobby.
No, registering for a sales tax permit doesn't automatically make the IRS classify your activity as a business. These are separate systems with different purposes. State sales tax departments are concerned with collecting tax on transactions regardless of profitability, while the IRS is looking at your intent and the nature of the activity. You can have a sales tax permit and still legitimately classify your quilting as a hobby for federal income tax purposes if you meet the hobby criteria (not primarily profit-motivated, occasional sales, etc.). Just be prepared to explain the distinction if asked. Many crafters are in exactly your situation - required to collect sales tax by their state but properly reporting as hobby income federally.
One trick I learned from an accountant friend - keep a separate log for your hobby sales that clearly documents each sale with dates, amounts, and context (like "church fundraiser" or "neighbor request"). This helps establish the occasional/non-commercial nature of the sales if questioned. Also track your expenses separately from any business activities. When my wife started selling her paintings occasionally, we created a simple spreadsheet showing that she was actually spending more on supplies than she was making from sales, which helps support the hobby classification. The key is showing you're not primarily motivated by profit.
This is good advice. Would you recommend keeping physical receipts too or is a digital log enough? I'm trying to minimize paperwork for my spouse's occasional pottery sales.
Digital logs are generally fine for hobby activities, but I'd recommend keeping digital copies of receipts (photos work great) rather than just logging amounts. The IRS accepts digital records as long as they're clear and legible. For pottery supplies especially, having the actual receipt shows what you bought and when - paint, clay, glazes, kiln costs, etc. This creates a stronger paper trail than just writing "supplies - $45" in a spreadsheet. Plus if you ever get questioned about the hobby vs business classification, detailed expense records showing you're spending more than you're earning really helps your case.
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Has anyone actually been audited over mileage? I've been a 1099 contractor for 6 years and honestly just guesstimate my miles. Never had any issues.
I got audited specifically over mileage deductions 2 years ago. Had to pay back over $3700 plus penalties because I couldn't prove my miles. They absolutely do check this stuff. Don't learn the hard way like I did!
As someone who's been through the 1099 contractor maze myself (freelance graphic designer), I can confirm what others have said about the temporary work location rule being your friend here. The key distinction is that you don't have a "regular" workplace - you're bouncing between different client sites that are all temporary by nature. One thing I'd add that hasn't been mentioned yet: make sure you're also tracking any trips between job sites during the same day. If you go from your home to Site A, then to Site B, then back home, ALL of those miles are deductible business miles, not just the initial trip from home. Also, with 24,000 miles, you're looking at potentially $15,720 in deductions at the current rate (24,000 × $0.655). That's a huge amount to leave on the table! Definitely worth getting this sorted out properly. The documentation advice from @Ravi Sharma is spot on - I learned that lesson during a small audit a few years back. Better to over-document than under-document when it comes to the IRS.
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14 This QBI stuff is honestly one of the most confusing parts of the tax code. Has anyone found any good resources that explain it in plain English? I'm still not sure if my business even qualifies.
16 Check out IRS Publication 535, specifically the QBI section. It's still tax language but clearer than most sources. The basic requirements are: you must have income from a qualified trade or business, be a sole proprietorship, S-corp, partnership, or LLC, and your taxable income must be under certain thresholds for the full deduction.
I just want to add my experience for anyone still struggling with this. After reading through all these comments, I ended up calling the IRS directly (took 3 hours on hold!) and spoke with a representative who confirmed everything mentioned here. The key points that helped me: 1. Statement A-QBI is NOT a pre-printed IRS form - you create it yourself 2. Use the format suggested earlier with business name, EIN, ownership %, QBI amount, W-2 wages, and qualified property 3. The statement should be clearly titled and include your identifying information 4. Attach it to your return when claiming the QBI deduction I also learned that if you have multiple businesses, you need to list each one separately unless you've made a proper aggregation election. The IRS agent stressed that documentation is key - they want to see your work clearly laid out in case of an audit. For what it's worth, I ended up creating a simple spreadsheet format that I printed out, and it worked perfectly for my filing. Sometimes the simplest approach is the best!
Thanks for sharing your experience! It's really helpful to hear confirmation from someone who actually spoke with the IRS directly. I'm a newcomer to this community and dealing with QBI for the first time with my small consulting business. Your point about documentation being key for audits is especially valuable - I hadn't really thought about how this would look from an auditor's perspective. The spreadsheet format sounds like a great approach that would be clear and professional. One quick question: when you say "proper aggregation election," do you know if that's something that needs to be filed separately or can it be done as part of the regular return? I have a few different income streams that might qualify and I'm trying to figure out the best way to handle them.
Welcome to the community, Leila! Great question about aggregation elections. From what I learned during my IRS call, the aggregation election is typically made on your tax return itself - you don't need to file a separate form. However, you need to meet specific requirements like having common ownership and either integrated operations, similar businesses, or shared facilities/personnel. The IRS agent mentioned that if you're eligible to aggregate, you'd include a statement with your return explaining the basis for aggregation and then list the aggregated businesses as a single line on your Statement A-QBI rather than separately. But if you don't meet the strict aggregation requirements, you definitely want to list each income stream separately to avoid any issues. Given that it's your first time dealing with QBI, you might want to consider keeping them separate this year unless you're confident they meet the aggregation rules. It's generally safer to be more detailed than less when it comes to IRS documentation. The extra paperwork is worth avoiding potential audit questions down the road!
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I'm a real estate tax guy and see this situation all the time with clients. Here's my take: You absolutely need to report your portion of the 1031 exchange on your personal return, which typically means filing Form 8824. The key thing most limited partners miss is that you need to adjust your basis in the new partnership interest. The exchange doesn't reset your basis - it carries over from your old partnership interest (with some possible adjustments). If you don't track this correctly, you could end up paying too much tax when you eventually sell or paying tax on phantom income during ownership. Also, check if you received any cash or other non-like-kind property (boot) as part of the exchange. That would be immediately taxable even though the main gain is deferred.
Thanks for this detailed response! The basis tracking part is what's confusing me. My K-1 has a supplemental statement about "tax basis capital" that changed after the exchange. Is this the basis I need to track, or is there something else I should be looking for? The statement mentions something about "704(c) forward section 1231 gain" that I don't understand.
The "tax basis capital" on your K-1 is related to your basis, but it's not necessarily the exact number you need to track for your personal tax situation. This gets complicated because partnerships can use different methods for tracking capital accounts. What you need to focus on is your "outside basis" in the partnership interest. Generally, your outside basis in the new partnership should equal your outside basis in the old partnership, adjusted for any boot received or liabilities assumed during the exchange. That "704(c) forward section 1231 gain" reference indicates deferred gain that's being tracked at the partnership level under section 704(c). This will affect how future depreciation and gains are allocated to you. It's essentially tracking your share of the built-in gain that was deferred in the 1031 exchange. When the new property is eventually sold (without another 1031), this deferred gain may become taxable to you.
Has anyone used TurboTax for reporting a K-1 from a 1031 exchange? I'm trying to figure out if I need to upgrade to their business version or if the premier version can handle this. Their support wasn't very helpful when I asked about form 8824.
Thanks for confirming! I'll stick with Premier then. Did TurboTax guide you through which numbers to enter where, or did you have to figure that out yourself? My supplemental statement has about 10 different numbers related to the exchange and I'm not sure which ones need to go on which lines of Form 8824.
TurboTax Premier can handle Form 8824, but honestly the guidance is pretty limited for complex partnership exchanges. You'll need to manually figure out which numbers from your supplemental statement go where on the form. I found myself constantly referring back to the IRS instructions for Form 8824 and Publication 544 to make sure I was entering things correctly. The software asks for the basic exchange information but doesn't really help you interpret the partnership-specific details from your K-1 supplemental statements. If your situation is straightforward it should work fine, but if you have complications like boot received or multiple properties involved, you might want to consider getting professional help rather than trying to navigate it solo in TurboTax.
Sean Doyle
I recommend you make a copy of the check when you pay that $58k and keep proof of payment forever. The IRS systems don't always talk to each other, and I've seen cases where one department doesn't know what the other is doing. The lock-in letter may have been processed before they knew you were about to pay.
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Zara Rashid
•This is solid advice. I paid off a tax debt and then 6 months later got a letter saying I still owed. Thankfully I had kept the cancelled check and receipt. The IRS eventually fixed it but it would have been a nightmare without that proof.
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Rami Samuels
Just went through this exact situation last month. The lock-in letter and your $58k tax bill are definitely connected - the IRS issued the lock-in because they see a pattern of underpayment and want to prevent it from continuing while you're resolving the existing debt. Here's what you need to know: paying off that $58k won't automatically remove the lock-in letter. These typically stay in effect for at least 12 months regardless of whether you've paid your back taxes. However, once you've paid the debt and can demonstrate compliance, you can appeal the lock-in or request a review. My advice - pay that $58k as planned (keep all documentation!), then immediately call the IRS number on the lock-in letter to discuss your situation. Explain that you've now paid the full debt and want to work with them on the withholding issue. Sometimes they're more willing to work with you once they see you've taken care of the outstanding balance. Also, double-check that your wife's employer received and processed the lock-in letter correctly. Some employers mess up the implementation, which can cause additional headaches down the road.
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