Has anyone dealt with this for larger settlement amounts? I got $8,400 from a class action against my former employer but it wasn't for lost wages - it was for improper handling of retirement accounts. The IRS is trying to hit me with SE tax too.

I went through this exact same situation last year with a $3,200 settlement from a data breach class action. The IRS initially tried to classify it as self-employment income, but I successfully challenged it. Here's what worked for me: I wrote a detailed response letter explaining that the settlement was compensation for damages related to a data breach, not payment for any services I provided. I emphasized that this was a one-time payment unrelated to any trade or business activity on my part. The key is to be very clear about the nature of the settlement. Since yours was from a class action (not related to your work or business), it should be reported as "other income" but definitely not subject to self-employment tax. Make sure to include the settlement letter you received and clearly state that you were a passive recipient of the settlement as an affected consumer, not someone providing services. Don't just pay the $362 - it's worth challenging this. The IRS automated system often incorrectly flags miscellaneous income without proper 1099s as potential self-employment income, but that doesn't mean they're right. You have a strong case for getting this reclassified properly.

I know everyone's talking about the tax deduction part but don't forget about the BUSINESS side of this decision! If you wait till 2025 to buy equipment, you're delaying your ability to create content NOW that could be building your audience. My fitness channel grew for almost a year before I made my first dollar from coaching. That pre-revenue content was crucial for establishing credibility. Sometimes the business investment makes sense even if the tax deduction timing isn't perfect!

Great question! I'm in a similar boat with my consulting side hustle. One thing to consider is setting up your business entity (LLC or sole proprietorship) now even if you're not actively coaching yet. This can help establish that "business start date" for tax purposes. Also, document EVERYTHING - your business plan, market research, content creation timeline, etc. The IRS loves to see that you have a genuine profit motive and aren't just trying to write off personal gym equipment. If you can show you're seriously preparing to launch a legitimate business, purchasing equipment in advance becomes much more defensible. I'd also suggest talking to a tax professional about whether it makes sense to elect Section 179 expensing vs. regular depreciation for your equipment purchases. Depending on your total income from all sources, one approach might be significantly better than the other.

What tax software did y'all use for prior year returns? I tried using the current TurboTax but it doesn't let me do 2021 anymore.

I went through this exact same situation about 3 years ago - hadn't filed for 4 years due to job loss, depression, and just general life chaos. I was absolutely terrified, convinced I'd face huge penalties or worse. Here's the reality: if you've been W-2 employed with proper withholding, you're probably in much better shape than you think. I actually ended up getting refunds for 2 of the 4 years I hadn't filed! The IRS has what's called "Reasonable Cause" provisions for penalty relief when you have legitimate reasons for not filing (which your circumstances definitely sound like they qualify). I wrote a simple letter explaining my situation when I submitted my returns and got most penalties waived. My advice: Don't wait any longer. The failure-to-file penalty keeps accruing monthly, and you're also losing out on potential refunds that expire after 3 years. Start with gathering your documents - if you're missing W-2s, request your wage transcripts from the IRS first. Then tackle the most recent year first since it's usually the most important to get current. The anticipation and fear was honestly 10x worse than actually dealing with it. You've got this!

Has anyone else successfully charged between their own business entities like OP is considering? I'm in a somewhat similar situation with a consulting business and a rental property, and I sometimes do consulting work that benefits the rental. Never thought about actually charging between them.

This is a really nuanced situation that requires careful handling. Based on what you've described, you're actually in a decent position to maintain business classification despite the recent losses. For your first question about the vacation rental paying your advertising business - this is absolutely legitimate as long as you treat it like any other business transaction. Create proper invoices, document the services provided, and charge fair market rates. This can actually help your Schedule C business show some income while providing a legitimate deduction for your rental property. Regarding the hobby classification concern - don't artificially inflate profits by not reporting expenses. Instead, focus on documenting your profit motive. Since you've had profits for most of the 20 years, that's strong evidence in your favor. Make sure you're documenting: - Your business plans and efforts to return to profitability - Marketing activities to drum up new clients - Any changes you've made to improve operations - Your expertise and time invested in the businesses The IRS looks at the totality of circumstances, not just recent losses. Your long history of profitability combined with documented efforts to improve the struggling business should support your business classification. The fact that you're actively trying to get new clients for the low-revenue business is particularly important to document. Consider keeping detailed records of your business development activities, client outreach efforts, and any strategic changes you're implementing. This demonstrates the businesslike manner and profit motive the IRS looks for.

This is really helpful information everyone! I'm in a similar boat - been paying a TPA for years for my Solo 401k when my balance has been under $200k the whole time. Based on what I'm reading here, it sounds like I have a few options: 1. File one final 5500-SF marking it as terminated/final to avoid any IRS questions later 2. Just stop filing and deal with any potential inquiry letter (which sounds pretty manageable based on Cameron's example) 3. Keep filing even though I'm not required to, just for peace of mind I'm leaning toward option 1 - filing a final form and then stopping. Has anyone actually done this termination approach? What exactly do you check on the form to indicate it's your final filing? Also, for those who've used the EFAST2 system - do you need any special software or can you do everything through their web portal?

I went through this exact situation two years ago! I had been paying my TPA about $800/year for my Solo 401k when my balance was only around $180k. Like you, I felt like I was throwing money away. I ended up doing exactly what Sophia mentioned - filed one final 5500-SF with the "Final Return/Report" box checked. It was actually pretty straightforward once I got into the EFAST2 system. The hardest part was just getting over my initial nervousness about doing it myself. One thing I wish I had known earlier: you can actually request copies of your previous filings from the DOL to use as a reference. This helped me understand what my TPA had been submitting and made me more confident about filling out my final form correctly. Since then, I've had zero issues with the IRS. No letters, no questions, nothing. I've saved over $1,600 in TPA fees so far and honestly wish I had made the switch sooner. The peace of mind from properly closing out the filing history was definitely worth the small effort of doing that final form myself.