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6 What about payment processing? I'm starting a similar business and trying to decide between Square, PayPal, and traditional merchant services through my bank. Any recommendations for handling client payments for tax prep services?
10 I use Square for my accounting practice and it's been great. The fees are reasonable (2.6% + 10¢ per transaction) and clients can pay via credit card, Apple Pay, etc. You can even send professional invoices through it. Much better than my bank's merchant services which had monthly minimums and higher rates.
6 Thanks for the suggestion! I was leaning toward Square already but wasn't sure if it was the best option for professional services. Glad to hear it's working well for a similar business. The invoice feature sounds especially useful.
As a new tax preparer myself, I've found that Wells Banco Business Choice Checking has worked well for my startup. No monthly fee if you maintain a $500 minimum balance, and they offer 100 free transactions per month which should cover your expected volume easily. One thing I'd add to the great advice already given - consider setting up automatic transfers to move a percentage of each payment into that separate tax savings account. I set mine to transfer 30% of every deposit, and it's been a lifesaver for quarterly payments. Also, don't overlook the importance of having a good relationship with your banker. When tax season gets busy and you need quick answers about deposits or account issues, having someone you can call directly makes a huge difference. Good luck with your new business!
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Has anyone considered that this might be a good opportunity to restructure? When my father passed and his trust became irrevocable, we worked with an attorney to consolidate the three LLCs into one since they were all owned by the same trust anyway. This eliminated the need to transfer money between entities and significantly reduced administrative costs (three tax returns became one, etc).
Consolidating LLCs can sometimes create liability issues though. If one property has a lawsuit, all properties could be at risk in a single LLC structure. That's probably why they were separated in the first place. Did your attorney address this concern?
I went through a very similar situation when I became trustee of my father's irrevocable trust that owned multiple rental property LLCs. One thing I learned the hard way is to also check your trust document for any specific provisions about inter-entity transactions or capital contributions. Our trust had a clause requiring written trustee resolutions for any transaction over $20,000 between trust-owned entities, which we almost missed. Even though I was the sole trustee, I still had to formally document the decision and keep it in the trust records for potential IRS audits. Also, if you go with the inter-company loan route (which I'd recommend based on Charlotte's advice), make sure to actually service the loan properly. The IRS has been known to recharacterize loans as distributions if payments aren't made consistently. Set up automatic transfers for the payments if possible to maintain the paper trail. The whole process was more complex than I expected, but documenting everything properly from the start saved us headaches later when we had to provide records to the IRS for an unrelated audit.
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Don't forget that you need to have an accounting policy in place at the beginning of the year to properly use the de minimis safe harbor election. It's not just enough to decide at tax time that you want to use it. IRS requires a written policy (doesn't have to be complicated) establishing your expense threshold up to $2,500 per item/invoice. Also, keep in mind that this election is made annually by attaching a statement to your timely filed tax return (including extensions). The statement should say something like "Section 1.263(a)-1(f) de minimis safe harbor election" and include your name, address, TIN, and the statement that you're making the election.
Wait, I need to attach an actual statement to my return? My accountant never mentioned this! Is this something I can create myself or is there a specific form? And what happens if I've been using the de minimis election for a couple years but never attached this statement?
You do need to attach a statement, but it doesn't need to be on a special form. You can create it yourself - it just needs to include your information and a statement that you're electing to use the de minimis safe harbor under Treasury Regulation 1.263(a)-1(f). If you've been using the election in previous years without the statement, you technically haven't properly made the election. However, many taxpayers are in this situation. You can start properly making the election going forward. The risk of not having attached the statement in prior years is that if you're audited, the IRS could potentially disallow your immediate deductions and require you to capitalize and depreciate those items instead. But realistically, for most small landlords, this isn't a high audit risk area if you've been consistent with your approach.
Something else to consider - the de minimis safe harbor doesn't apply to improvements that are part of a larger project. So if you're doing a kitchen remodel and buy 5 cabinet pulls for $15 each, you can't use de minimis for those even though individually they're under the threshold, because they're part of a larger improvement. I learned this the hard way when I got audited last year. The IRS made me recapture a bunch of small expenses I had deducted under de minimis because they were actually part of a bathroom renovation project that should have been capitalized.
This is super important info! How do you determine what counts as "part of a larger project" though? Like if I replace all the doorknobs in my rental ($30 each), is that a single improvement project or can I use de minimis since each doorknob is under the threshold?
The "larger project" determination can be tricky and it's one of the gray areas in the regulations. Generally, the IRS looks at whether the items are functionally related and performed as part of a single plan of rehabilitation or improvement. For your doorknob example, if you're replacing all doorknobs as part of a general property upgrade or renovation, that could be viewed as a single improvement project. However, if you're just replacing individual doorknobs as they break or wear out over time, those would likely qualify for de minimis treatment. The key factors the IRS considers are: timing (all done at once vs. spread out), functional relationship (do the items work together to improve a single area/system), and overall intent (maintenance vs. improvement). When in doubt, it's safer to capitalize items that could reasonably be seen as part of a coordinated improvement effort.
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5 Can someone explain the pro-rata rule issue with backdoor Roths? My financial advisor mentioned it could be a problem but didn't really explain it clearly.
8 The pro-rata rule is crucial to understand with backdoor Roth conversions. If you have ANY existing pre-tax money in ANY traditional IRA accounts (including SEP and SIMPLE IRAs), the IRS requires you to calculate conversions proportionally across all your IRA balances. For example, if you have $50,000 in traditional IRA assets (pre-tax) and you make a new $6,000 non-deductible IRA contribution that you want to convert via the backdoor method, you can't just convert the $6,000. The IRS considers 89% ($50,000 ÷ $56,000) of any conversion to be taxable. So if you convert $6,000, about $5,340 would be taxable income. This is why backdoor Roths work best for people who either don't have existing traditional IRA balances or who can roll their IRA funds into an employer 401(k) plan first (if the plan allows it).
This is a great question that highlights one of the most confusing aspects of retirement tax law. The income restrictions on Roth IRAs were originally designed as a revenue protection measure - Congress wanted to limit the immediate tax revenue loss from allowing high earners to contribute after-tax dollars that would grow tax-free forever. However, what many people don't realize is that the "backdoor Roth" strategy exists because of legislative oversight, not intentional design. When Congress removed income limits on Roth conversions in 2010 (primarily to generate short-term tax revenue), they didn't anticipate how this would interact with the existing rule allowing anyone to make non-deductible traditional IRA contributions. The IRS has been aware of this strategy for over a decade and has essentially given it tacit approval. In fact, they've published guidance on how to properly report these transactions. It's become such an accepted practice that many major brokerages now offer "backdoor Roth" as a standard service option. From a practical standpoint, if you're a high-income earner, this strategy remains completely legitimate and widely used. Just make sure you understand the pro-rata rule implications if you have existing traditional IRA balances, and document everything properly for tax reporting purposes.
Connor Gallagher
Does the 4314c letter mention anything about interest continuing to accrue? I had a similar situation but even after I paid what they initially said I owed, they charged interest for the time they were "reviewing" my documents. Ended up having to pay an extra $287.
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Yara Sayegh
•This happened to me too. Even though I paid what the CP2000 said I owed, I still got charged interest during their "review period." Make sure you check any future notices carefully because they might bill you for interest even if you paid the principal amount on time.
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Vincent Bimbach
I'm dealing with something very similar right now! Got a CP2000 in February for unreported 1099-B forms from my brokerage account, paid what they calculated I owed in full back in March, and just received a 4314c letter last week saying they need more time to review. It's so frustrating because like you, I thought everything was resolved when I made the payment. Reading through these comments though, it sounds like this is just how their system works - payment processing and document review happen in different departments that don't talk to each other. @Giovanni - did your 4314c letter give any indication about whether interest might still be accruing during this review period? That's my biggest concern right now since I see others mentioning they got hit with additional interest charges even after paying the initial amount.
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