The limited definition problem extends beyond just progressive taxation. I teach economics, and textbooks routinely oversimplify tax concepts to make them easier to teach, which unfortunately gets repeated everywhere. Real-world tax systems are incredibly complex with multiple overlapping philosophies. For example, the US corporate tax system has elements of: 1) Income-based progression (higher rates on higher income) 2) Industry-specific rates (differential taxation) 3) Behavior-based incentives (R&D credits, etc.) 4) Profit-rate considerations in certain cases But students only learn the basic "tax rate increases as income increases" definition, which gets repeated throughout their education and careers. It's similar to how we teach supply and demand curves as always being straight lines when they rarely are in reality.

I actually wrote my dissertation on this exact topic! The reason "progressive taxation" is so narrowly defined is because of a deliberate political choice in the early 20th century. When modern income tax systems were being developed (1910s-1930s), there were competing proposals for progressive taxes based on wealth, land value, corporate profit rates, and income. The income-based approach won out partly because it was easier to implement with the administrative capabilities of the time, but also because it was less threatening to accumulated wealth. A progressive wealth tax would have directly challenged the existing power structures more than income taxes. By focusing the definition of progressive taxation exclusively on income, it shifted the burden to high-income earners while protecting those with substantial accumulated wealth. This definition then became codified in academic literature, policy discussions, and eventually public understanding.

One approach my accountant suggested was to look at what I'd have to pay someone else to do my job. If you'd have to pay someone $30k to do the work you do in your business, that's a good benchmark for "reasonable compensation" regardless of profitability. My S-corp is slightly bigger (around $120k gross), but I take a $36k salary which is what we determined would be the replacement cost for my specialized work. I've also documented WHY this is reasonable in case of audit - job listings for similar positions, industry salary surveys, etc. The benefit of S-corps is avoiding SE tax on distributions, but you have to play by the reasonable salary rules to get that benefit. Otherwise, the IRS position is basically "if you want to take all distributions, just be a sole prop or LLC.

Has anyone used the "minimum wage" method for establishing reasonable compensation? My CPA suggested that at minimum, I document all hours worked in the business and pay myself at least minimum wage for those hours as salary. For example, if I work 20 hours a week (1,040 hours/year) and minimum wage is $15/hour, my minimum reasonable salary would be $15,600. He said this approach works better for businesses with low profit margins, and it's easier to defend than a percentage of revenue or profit.

Just a tip from someone who went through this exact situation with the Recovery Rebate Credit and CP13 notice - make sure you keep copies of EVERYTHING you send to the IRS and send it via certified mail so you have proof of delivery. The IRS is notorious for "losing" correspondence, especially with these stimulus payment disputes. Also, when you write your response letter, put your notice number, tax ID, and tax year in the subject line AND at the top of every page. Make it super obvious what your letter is about. And be really clear and direct about why you're eligible for the Recovery Rebate Credit despite being claimed as a dependent on someone's 2019 return.

Just a heads up that if you were claimed as a dependent on ANYONE'S 2019 return, you were technically ineligible for the first two stimulus payments as an individual. The law was written that way, even if the person who claimed you didn't receive a payment for you either. This is a really common misunderstanding about the Recovery Rebate Credit. Even if you weren't properly claimed as a dependent (like in your case where you probably didn't qualify as one), the fact that someone DID claim you is what matters to the IRS automated systems.

To answer your original question - a GOOD tax preparer should be finding you every legitimate deduction you qualify for while keeping everything accurate and documented. It's not an either/or situation. My accountant helped me deduct about $4200 more than I thought possible when I started my small business, but she also insisted on proper documentation for everything. She explained that aggressive but legitimate deductions are fine, but we need records to back everything up. The real value isn't just in finding deductions - it's in their knowledge of what's allowed, what requires special documentation, and what might trigger audits. Anyone promising huge magical deductions without talking about documentation is probably sketchy.

I actually switched from a "find every deduction" guy to a more conservative preparer after getting audited three years ago. My old preparer found me tons of deductions but didn't explain what documentation I needed. When I got audited I was completely unprepared. My new accountant is super thorough and explains everything. She still finds deductions but is careful to make sure I understand what records to keep. I actually get roughly the same refund amount but with WAY less anxiety. Good tax prep isnt about being aggressive or conservative - its about being THOROUGH and KNOWLEDGEABLE. Good preparers know exactly where the lines are and help you get every benefit you're entitled to without crossing those lines.

2 Don't forget about improvements! If your aunt or you made any major improvements to the property (new roof, renovation, addition, etc.), those can be added to your basis and reduce your capital gains. You'll need receipts though!

3 Has anyone used a tax professional for this kind of situation? My tax software is confusing me with all these basis questions and I'm worried about making a mistake.