I heard somewhere that the government actually WANTS people not to file when they're owed money because they get to keep it. Is that true? Like is that why they make the whole process so complicated?

I don't think there's some grand conspiracy to keep your refund money. The IRS actually sends notices to people who should have filed but didn't - that wouldn't make sense if they were trying to keep your money. The complexity comes from the tax code itself having thousands of provisions and special cases, not from some plot to confuse people into giving up refunds. Most tax software has made it pretty easy for straightforward situations. But the psychology might be right - when the process feels overwhelming, some people do give up and let the government keep money they're entitled to.

Which free service do you recommend? I tried using one last year and they kept trying to upsell me on stuff I didn't need. Ended up paying like $89 for what was supposed to be "free".

I hadn't even thought about the basis implications for future sales. Does that mean it's actually better from a long-term perspective if it's treated as compensation up front, even if I have to pay taxes now?

Yes, that's exactly right. If it's compensation, you'll pay ordinary income tax now, but your basis becomes the full fair market value ($1.3 million in your example). Then when you sell later, you only pay capital gains tax on the appreciation above $1.3 million. If it's a gift, you'll avoid taxes now, but you inherit the original owners' basis. If they started the company and have a very low basis (maybe just thousands of dollars), when you sell, you'd pay capital gains tax on almost the entire sale amount. So while you avoid taxes now, you could end up with a much larger tax bill later when you sell.

This is such an important point! My friend got equity in an LLC and got hit with a $30k tax bill from her K-1 allocation even though the company didn't distribute any cash to cover it. Make sure you understand the tax structure BEFORE accepting.

We're an LLC, so that's really helpful to know. So even if the initial gift doesn't trigger taxes, I could still end up with tax bills from my portion of company profits regardless of whether distributions are made?

But doesn't filing Schedule C mean you have to pay self-employment tax on top of regular income tax? That's an extra 15.3% right? Wouldn't that wipe out any benefit from the deductions unless you have a ton of expenses?

You're right about the self-employment tax, which is about 15.3% on net profit. But photography equipment is expensive! If you've purchased a decent camera, lenses, tripod, editing software, etc., those deductions can significantly reduce your taxable profit. For example, if you made $600 but had $400 in legitimate expenses, you'd only pay self-employment tax on $200. That's much better than paying regular income tax on the full $600 with no deductions. Plus, you can deduct mileage to photo locations, a portion of your home internet if you use it to transfer/upload photos, cloud storage costs, etc. Just keep good records of your expenses and make sure they're genuinely related to the photography work. Even with occasional sales, the deduction benefits often outweigh the self-employment tax costs.

You're mixing up two different concepts. If you file as a business on Schedule C, you can claim losses (expenses exceeding income). If it's a hobby, you used to be able to deduct expenses up to the amount of income, but that was eliminated with the 2018 tax law changes. Now hobby expenses aren't deductible at all - you report all the income but get no deductions. That's why many people with "hobby" income now choose to file Schedule C instead - to actually get the deductions. But the IRS has a "hobby loss rule" where if you show losses for too many years (generally 3+ out of 5), they may reclassify your business as a hobby and disallow those losses.

How difficult was the name change process? We've been thinking about doing this for a while but my wife has been putting it off because she thinks it'll be a huge hassle with courts and paperwork.

It was way simpler than we expected! The exact process varies by state, but generally you file a petition with your local court, pay a filing fee (ours was about $150), and attend a brief hearing. We filled out all the forms ourselves without a lawyer. The whole process took about 2 months from filing to getting the official name change order. After that, we just had to update his Social Security card, which was straightforward with the court order in hand. The most time-consuming part was updating all his records afterward (school, doctor, etc.) but even that wasn't bad.

This is good advice. I work at a tax prep office (not a professional) and we see this all the time. The SSN is the key identifier and as long as nobody else claimed that SSN, you're usually ok even with minor name discrepancies.

Do you think the knowledge gained is worth possibly missing deductions though? I'd hate to leave money on the table just to learn how the system works.

That's a fair concern. The knowledge gained probably isn't worth missing major deductions your first year. A good compromise might be using a tax professional this year, but requesting a detailed walkthrough of what they're doing and why. Most will provide a summary of deductions they found and tax-saving strategies. Then use that knowledge next year if your situation remains similar. The first-year learning curve with a side business is the steepest, so professional help makes sense now. If you continue the business, you'll be much better prepared to DIY next year if you want to save the professional fees.

I used TaxFyle last year which does that. You input everything into their system and then a CPA reviews it. Cost me about $150 which was way less than full service. The CPA actually found a mistake that would have cost me about $400, so definitely worth it in my case.