Has anyone considered the implications of Tax Cuts and Jobs Act on this? I think it amended some of the definitions for software depreciation vs. amortization. Not 100% sure but I think it may have expanded what counts as qualified property.

I'm dealing with this exact same issue for my consulting business! After reading through all these responses, I'm starting to think the key is really in how you're treating the software for depreciation purposes on your books. For what it's worth, I found a really helpful IRS publication (Pub 946) that talks about depreciation of computer software. It specifically mentions that computer software that's readily available for purchase by the general public is treated as tangible personal property and can be depreciated over 36 months. Based on that, it seems like if your $45,000 in specialized software falls into the "readily available" category (even if it's industry-specific), and you're depreciating it rather than amortizing it, you should have a good argument for including it as qualified property for 199A purposes. I'd definitely recommend documenting your position clearly and maybe getting a second opinion from another tax professional. The fact that multiple people here have gotten confirmation from IRS agents about off-the-shelf software qualifying gives me more confidence in this interpretation.

Quick question about timing - if I received property via quitclaim deed in December 2024, but don't sell it until January 2025, which tax year would any potential capital gains fall under? I'm trying to decide if I should wait until January to sell to push any tax liability to next year's return.

I had a similar situation with my grandmother's property last year and want to share what I learned about the basis calculation since that seems to be a key issue here. When your father transferred the property to you and your brother as a gift, you inherited his "basis" in the property - which is what he originally paid for it plus any qualifying improvements he made over the 25 years. This is called a "carryover basis." The tricky part is figuring out what your portion of that basis was when you transferred to your brother. If the property had a total basis of, say, $100,000, your half would be $50,000. If you truly received nothing from your brother, you'd actually have a capital LOSS of $50,000 that you could potentially use to offset other gains. However, if your brother did pay off debt or give you other compensation, you'd need to compare that amount to your basis to determine if you have a gain or loss. The key is getting accurate records of your father's original purchase price and improvements - you'll need those numbers regardless of which direction this goes. I'd strongly recommend getting professional help with this calculation since the basis determination can be complex and the tax implications are significant.

pro tip: bookmark https://taxr.ai and check it weekly. saves so much stress trying to decode these letters and transcripts yourself

Don't panic! This happened to me too when I filed early last year. The IRS verification of non-filing letters are automatically generated based on database snapshots at specific dates. Since you filed in January and this letter is dated February 9th, there's a good chance your return was still in their processing queue when they ran this check. The Philadelphia office handles a lot of these routine verification requests, and the timing is actually pretty standard for early filers. Just keep your filing confirmation handy and maybe check your account transcript in a week or two to see if it shows up as processed. No need to refile unless you get additional correspondence saying there was actually an issue with your submission.

For the cloud computing expenses specifically, make sure you're keeping detailed records of what services you purchased and how they were used/resold. I got audited last year specifically on this issue and having good documentation saved me. I created a simple spreadsheet that tracked: - Date of purchase - Vendor - Description of service - Cost - Client it was allocated to - Invoice # where I resold it The IRS auditor actually complemented me on how organized everything was. They verified several transactions and then accepted the entire category.

@Dominic Green - Great questions! I'm also a software developer who struggled with these same categorization issues when I started my business. Here's what I've learned through experience and working with my CPA: For your $11,000 in VPS cloud servers, you're absolutely right to categorize them as Cost of Goods Sold. The fact that they're digital services doesn't change the fundamental principle - you're purchasing them to resell to clients, which is textbook COGS. Don't worry about the amount triggering an audit - tech businesses naturally have different expense patterns than traditional retail. One tip I wish I'd known earlier: set up a simple tracking system now for those monthly VPS purchases. Even just a basic spreadsheet with date, vendor, amount, and which client it's for. This will save you headaches during tax season and provide solid documentation if needed. Also, consider talking to a CPA who specializes in tech businesses. The investment in professional advice early on can save you significant time and stress, especially as your business grows. Many of the categorization questions you're asking are pretty standard for our industry, and a good tax pro can set you up with systems to handle them properly going forward. Good luck with your filing!

I actually learned about this distinction the hard way. Got audited in 2021 for my 2019 return where my accountant did exactly this - combined COGS and supplies. The IRS agent specifically flagged it because my "supplies" expense was way higher than typical for my industry while COGS was zero, which made no sense for a retail business. Ended up having to provide extensive documentation breaking down what was inventory vs. supplies. Didn't owe additional tax but it was a massive headache that cost me about $1,800 in accountant fees to resolve. Don't recommend the experience!

This is exactly why I always double-check my Schedule C before filing! Your CPA definitely made an error here - COGS and supplies should absolutely be separated. For a craft business with inventory like yours, the $24,500 in materials should be in Part III (COGS) and the $5,300 in office/shipping supplies should be on line 22. While your tax liability is probably the same either way, proper classification matters for IRS compliance and industry benchmarking. I'd recommend having a conversation with your CPA about this - she should be willing to explain her reasoning or acknowledge the mistake. If she can't provide a good explanation, you might want to consider filing an amended return to get it properly categorized. Don't feel bad about questioning this - you're paying for professional service and have every right to understand how your return was prepared!