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That Lamborghini example is actually terrible tax advice. The tax court has repeatedly ruled against luxury vehicle deductions when they're excessive for the needs of the business. Even if you have a legitimate business, expenses must be "ordinary and necessary" - a Lambo is neither for most businesses. Look up the "Wellburn Yacht" case where a guy tried to deduct a yacht as a business expense and got hammered. Or the dentist who tried to write off his Corvette as a business vehicle. These are famous tax court cases because they're such obvious examples of pushing the limits.
But what about influencers who actually DO use luxury items as part of their business model? Like if your entire content is about luxury cars, wouldn't a Lambo be considered necessary?
That's a good question. For established influencers with substantial income from content specifically about luxury vehicles, there might be a legitimate case. However, the burden of proof would be extremely high. You'd need to show the direct connection between the specific vehicle and revenue generation, demonstrate that the entire vehicle (not just a portion) is used for business, and prove that the expense is reasonable relative to your business income. Most importantly, you'd need to show a history of profitability or a reasonable path to profitability. Starting from zero with a huge expense like a Lamborghini would be extremely difficult to justify to the IRS.
The biggest red flag in your post is the phrase "bogus side business" - that's literally admitting to tax fraud lol. The IRS doesn't play around with this. My cousin tried claiming his fishing boat was for a "fishing guide business" he had no intention of running and got audited. Ended up owing back taxes PLUS a 20% accuracy-related penalty.
Quick tip that helped me with the K2/K3 exception determination: take screenshots of the specific lines (16 and 20c) from your 2020 return as documentation of meeting that requirement. This way if there's ever a question about why you didn't file K2/K3, you have proof that you qualified for the exception. Also, put a note in your tax file documenting your analysis of each requirement - especially regarding the "no foreign activity" determination. If you have any international clients, document why those relationships don't constitute "foreign activity" under the definition (no foreign taxes paid, no foreign source income, etc.). Better to document your reasoning now than try to reconstruct it later if questions arise.
Does anyone know if this exception is continuing for the 2022 tax year? I finally understand the 2021 exception but wondering if I need to prepare for K2/K3 filing for current year.
The exception has been modified for 2022 and future years. Starting with tax year 2022, there's a "domestic filing exception" with slightly different requirements. Partners or S corp shareholders must be notified about the intention to not provide K-3s unless requested. You'll need to review the updated guidelines for 2022, as the automatic exception isn't identical to the 2021 version we're discussing here.
Has anyone used any specific tax software that handles the K2/K3 exception determination well? I'm using ProSeries and it keeps flagging that I need to file these forms even though I believe we qualify for the exception.
I had the same issue with Lacerte. You have to manually override it. There should be a checkbox somewhere in the software to indicate you qualify for an exception. In Lacerte it's buried in the K-2/K-3 input screens - there's a specific question about qualifying for the exception that you need to mark "Yes".
Thanks for the tip! I found the override option in ProSeries. It was in the K-2/K-3 input area under "Filing Exceptions" - there's a check box for "Qualifies for domestic filing exception" that I needed to select. The software still gives a warning but allows you to proceed without generating the schedules.
Just FYI, when making payments through Pay1040, there's a processing fee that varies depending on how you pay. It's around 1.87% if you use a credit card (minimum $2.50) or $2.55 flat fee for direct debit from your bank account. I've been making partial payments for the past 3 months. I always choose the direct debit option since it's cheaper for payments over about $140. One thing to remember is to print or save the confirmation for each payment - I've had one payment that didn't get properly credited to my account at first, and having that confirmation made it much easier to get it sorted out.
Thanks for that tip! Do you know if the other payment processors (PayUSAtax or ACI Payments) have different fees? Are any of them cheaper than Pay1040?
Yes, each processor has slightly different fees. Last I checked, PayUSAtax charges 1.96% for credit cards (minimum $2.69) and $2.55 for direct debit, while ACI Payments/Official Payments charges 1.99% (minimum $2.50) for credit cards and $2.00 for direct debit. So if you're using direct debit, ACI Payments is actually the cheapest at $2.00 flat fee. If you're using a credit card, Pay1040 is still the best deal at 1.87%. The differences aren't huge, but they can add up if you're making multiple payments.
I just wanted to share that I did exactly what you're describing last year - owed about $1,800 and made payments over 5 months without setting up a formal plan. I used Pay1040 and selected "Form 1040 Series" like others have mentioned. One thing no one has pointed out yet: make sure you factor in the failure-to-pay penalty, which is 0.5% per month (or partial month) on the unpaid balance, capped at 25% of the unpaid amount. This is on top of the interest. The IRS will recalculate your balance every time they process a payment, but they don't always send updated notices. I ended up paying about $45 in combined penalties and interest by the time I was done, which wasn't too bad considering the flexibility it gave me.
Do you know if the failure-to-pay penalty applies even if you've filed on time? I thought that was only if you filed late?
I went through this exact issue last year. I ended up filing an extension and it was the right choice for me. Amending is a pain and can flag your return for extra scrutiny sometimes. Just make sure you pay enough with your extension to cover what you might owe. The 5% difference you're expecting isn't huge, so if you're expecting a refund anyway, you could just file with what you have. But if you're going to owe money, definitely do the extension and pay a bit extra to be safe.
If you do file an extension, do you know if that increases your chances of being audited? I've heard mixed things about this.
Filing an extension doesn't increase your audit risk at all. That's actually a common tax myth. The IRS has officially stated that filing an extension doesn't affect your chances of being audited. In fact, extensions are incredibly common - millions of people file them every year for all sorts of reasons. It's a routine process that the IRS expects. What can increase audit risk is filing an inaccurate return or having to amend later, so in that sense, waiting for correct documentation is actually the safer approach.
Another option to consider is contacting your employer directly and asking when they expect to issue the W-2C. Sometimes they have a timeline but don't communicate it well. I've found that a polite but firm email to HR and payroll can work wonders. If they can tell you it'll be ready within a few weeks, maybe waiting makes sense. If they're saying it could be months, then the extension route is probably best.
Amara Okafor
Just a heads up that you might want to consider doing a backdoor Roth conversion since you can't deduct your traditional IRA contribution anyway. I was in a similar situation with my income and found that converting my non-deductible traditional IRA to a Roth IRA made more sense tax-wise. Since you've already paid tax on that $6,500 contribution (by not being able to deduct it), you'd only pay taxes on any earnings when you convert to a Roth. And then all future growth would be tax-free. Just make sure you don't have any other pre-tax IRA money or the pro-rata rule will complicate things.
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AstroAce
ā¢Thanks for this suggestion! I've heard about backdoor Roth conversions but wasn't sure if they applied to my situation. If I'm understanding correctly, since I can't deduct the traditional IRA contribution due to my income, converting it to a Roth would mean I'm not being taxed twice? Do you know if doing this backdoor conversion would fix the TurboTax error I'm getting, or would it potentially create new complications for filing?
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Amara Okafor
ā¢You've got it exactly right - since you can't deduct the traditional IRA contribution, you've already paid tax on that money. If you convert to a Roth soon after contributing (before there's significant earnings), you'll pay very little or no additional tax on the conversion. Then all future growth will be tax-free when you withdraw in retirement. Regarding your TurboTax issue, doing a backdoor Roth actually might simplify things. First, fix your current issue by properly coding the inherited IRA distribution and marking your traditional IRA contribution as non-deductible. Once that's working, you can add the Roth conversion as a separate transaction. TurboTax has a specific section for Roth conversions that's generally quite straightforward. The software will generate Form 8606 to track your non-deductible basis and properly report the conversion.
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Giovanni Colombo
Just wondering - has anyone tried using other tax software instead of TurboTax for handling inherited IRAs? I've been having similar issues and thinking about switching to H&R Block or FreeTaxUSA.
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Fatima Al-Qasimi
ā¢I switched from TurboTax to FreeTaxUSA last year and found it much easier for handling my inherited IRA from my dad. Their interface for entering distribution codes is more straightforward, and they have really clear explanations about inherited IRA rules. Plus it's way cheaper!
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