This is so helpful! So basically if I have a single-member LLC, the IRS treats me exactly the same as if I just had a sole proprietorship? What's the advantage of multi-member then? My wife and I are thinking of starting a business together.

That's right - for tax purposes, a single-member LLC is treated exactly like a sole proprietorship. You file Schedule C with your personal return, and the LLC is completely "invisible" to the IRS. For you and your wife, it depends on your state. In community property states, a husband and wife can elect to treat their LLC as a disregarded entity (essentially a sole proprietorship) instead of a partnership, which simplifies filing. In non-community property states, a husband-wife LLC typically files as a partnership, which means a separate tax return (Form 1065) and Schedule K-1s. The partnership route involves more paperwork but can sometimes offer more flexibility in how income and expenses are allocated between owners.

You actually don't need an LLC to deduct legitimate business expenses. You can deduct the business portion of your computer, internet, home office space, and business travel on Schedule C as a sole proprietor. The LLC won't change what you can deduct - you just need to make sure they're ordinary and necessary expenses for your business.

I had the same issue with Fidelity. Their explanation is technically correct - the distributing plan doesn't always have visibility into your tax basis. But it's super unhelpful. I ended up using the full amount as taxable on my return (Form 8606 helped sort it out) and didn't have any issues. If you're using tax software, just override the default and enter the full amount as taxable.

Does anyone know how to attach an explanation to an e-filed return? Is there a specific form for this or is it just an attachment you add?

Most tax software has an option to include a statement or explanation with your e-filed return. In TurboTax, look for something like "Miscellaneous Forms" or "Statements" in the forms search. In H&R Block software, it's under "Miscellaneous Forms" as well. If you can't find it, you can also use Form 8275 "Disclosure Statement" for more complex situations, though that might be overkill for this issue. The key is making sure you properly report the correct taxable amount and documenting your good-faith effort to comply with tax laws despite receiving incorrect forms.

Does this also apply if the distribution was from a Roth IRA? I took money out in 2020 but thought Roth distributions aren't taxable anyway?

For Roth IRAs, it's a bit different. If you've had the Roth for at least 5 years and are over 59½, then qualified distributions are tax-free. However, if you took an early distribution from a Roth in 2020 that would normally be partially taxable (like earnings withdrawn before 5 years), you could still use Form 8915-E to spread any taxable portion over 3 years. If your Roth distribution was entirely from contributions (not earnings), then it wouldn't be taxable regardless, and the 3-year spread wouldn't apply since there's no tax to spread.

Form 8915-F is the new form for reporting qualified disaster distributions in 2021, but it's for NEW disaster distributions. If you're reporting the SECOND year of a 2020 coronavirus distribution that you already started reporting on 8915-E, you continue with 8915-E for all three years.

Do you have a separate business bank account for your styling purchases? My accountant keeps telling me I need to stop mixing personal and business expenses but setting up a business account seems complicated.

Yes, having a separate business account is absolutely essential! It doesn't have to be complicated - I started with a simple second checking account at my regular bank specifically for business transactions. Using separate accounts creates a clear audit trail that shows the IRS you're treating your styling work as a legitimate business, not a hobby. Most banks offer basic business checking with minimal fees, and the organization it provides is worth every penny. It made my tax preparation so much simpler since I wasn't trying to sort through mixed personal and business transactions at tax time. This separation is probably the single most important step you can take to legitimize your deductions.

This is super helpful context, thank you! Would you mind sharing what kind of documentation ended up satisfying the auditor for the editorial pieces? Did you have to show the actual clothing items or just photos of them being used professionally?

Thanks for mentioning the first-time penalty abatement - I had no idea that was even a thing! Is that something I'd need to specifically request or would they automatically check if I'm eligible?

You definitely need to specifically request first-time penalty abatement - they won't offer it automatically. When you call to set up your payment plan or after you receive your first notice with penalties, you can request it then. The magic words are "I'd like to request first-time penalty abatement under the IRS First-Time Abatement administrative waiver." You'll need to have a clean compliance history for the past 3 years (filed all required returns and had no significant penalties) to qualify. It can save you a good chunk of money since it typically waives the failure-to-pay penalty, which adds up over time. It doesn't waive interest though, just the penalties.

The IRS doesn't typically send confirmation emails when they process returns. If you filed through tax software, the software company usually sends a confirmation when the IRS accepts the return, but that's different from it being fully processed. You'll need to check "Where's My Refund" on the IRS website or your account in the online portal to see the status once their systems update.

Thanks for the info! I did get the acceptance email from my tax software but wasn't sure if that meant it was fully processed or just received. I'll keep checking the online portal.