Small business accountant here - here's a quick clarification that might help: COGS must always be reported separately from other business expenses, even when tiny. The tax consequences can be very different. If you report low/no COGS with significant sales, it's not automatically a red flag IF your business model logically explains the high profit margins. Many legitimate businesses have minimal COGS (digital products, certain services with product components, etc.

I'm in a very similar situation with my small online business! After reading through all these responses, I'm definitely going to start tracking my COGS properly even though the amounts are small. One thing I learned from experience - even if you think your costs are "too small to matter," the IRS really does expect to see COGS reported correctly on Schedule C. I made the mistake of lumping everything into regular business expenses my first year and got a notice asking for clarification. For anyone dealing with minimal documentation like yard sale purchases, I've found that keeping a simple log on my phone works great. I just note the date, general description ("misc household items from garage sale"), and total amount spent. It doesn't have to be perfect, but having something is way better than nothing if questions come up later. Thanks everyone for sharing your experiences - this thread has been super helpful for understanding how to handle this properly!

Just check your transcript tbh. If your return was accepted with the PIN youre good to go

From my experience, the IRS only sends letters if there's a problem or security issue with your IP PIN usage. If your return was accepted successfully, that's your confirmation that everything went through properly. You can always check your account transcript online to verify your return status if you want extra peace of mind!

When I was in a similar situation, I found that maintaining a detailed time log of all repair/maintenance activities was helpful for two reasons: 1) It helped document material participation for real estate professional status 2) It allowed precise allocation of expenses between properties It's also worth considering whether forming a separate property management LLC might make sense in your case, especially if the partners are spending significant time on maintenance. This can sometimes create a cleaner tax structure, though it adds administrative complexity.

Bit late to the discussion but wanted to add that we have a similar partnership structure for our rentals. We confirmed with our CPA that tools under the de minimis safe harbor threshold ($2,500 per invoice for most taxpayers) can be expensed immediately rather than capitalized, even for partnerships.

The most important thing is to ONLY answer the questions they ask. Don't volunteer extra information trying to be helpful. If they ask about your home office deduction, don't start telling them about your car expenses too. Stay focused on exactly what they're investigating. And if you don't know an answer, say "I'll need to look into that and get back to you" instead of guessing.

One thing that really helped me during my audit was creating a simple timeline of events leading up to the audit notice. Write down when you filed your return, when you received the audit letter, and any relevant business activities from 2023. This helps you stay organized mentally and shows the agent you're taking the process seriously. Also, if you're missing receipts for legitimate expenses, don't panic. The IRS often accepts alternative documentation like bank statements, credit card statements, or even contemporaneous records (like a business calendar showing client meetings). For your home office deduction, measure the space used exclusively for business and take photos showing it's clearly a dedicated workspace. Remember that the vast majority of audits result in either no changes or minor adjustments. The IRS isn't trying to "get you" - they're just verifying that your deductions are legitimate and properly documented. Stay calm, be honest, and stick to the facts.

Just a heads up, with business acquisitions like this, make sure you're looking at asset vs. stock purchase implications too! It can make a huge difference in depreciation/amortization deductions. My accountant told me I could have saved like $150k in taxes if I'd structured my purchase differently.

Great thread! I'm going through a similar acquisition right now and wanted to share what I've learned from my tax attorney. One thing that hasn't been mentioned yet is the imputed interest rules under Section 1274. If your interest rate is below the Applicable Federal Rate (AFR), the IRS will impute a higher rate anyway, which could mess up your tax planning. Also, don't forget to consider the allocation of the purchase price among different assets (goodwill, customer lists, equipment, etc.) since different assets have different depreciation schedules. Section 197 intangibles get amortized over 15 years, but some tangible assets might qualify for bonus depreciation. One more tip - if you're planning to use Section 1202 qualified small business stock exemption down the road when you sell, make sure your purchase structure doesn't disqualify you from that benefit. It's worth having this conversation with a tax professional who specializes in business acquisitions before you finalize the deal structure.