That's super helpful, thanks! My accountant mentioned something about "reasonable compensation" requirements for S Corps but wasn't clear on how that interacts with the K-1 income flowing in. Does the K-1 income from the LLC affect how much I need to pay myself as reasonable salary from the S Corp?

The K-1 income does indirectly affect reasonable compensation considerations. The IRS expects S Corp owner-employees to take a "reasonable salary" before taking distributions, which means your salary should be comparable to what would be paid for similar services in your industry. When your S Corp receives additional income (like K-1 income from an LLC), it increases the total profit available in the S Corp. If your responsibilities or time commitment increase due to this additional business activity, it might justify a higher reasonable salary. The key test is always what's reasonable for the actual services you're providing to the S Corp. Remember that paying yourself too little in salary and taking large distributions instead can be a red flag for the IRS, as it can look like an attempt to avoid payroll taxes.

I did this last year. The paperwork is a pain, honestly. You need to formally admit the S Corp as a member of the LLC, which means amending the LLC operating agreement. Then there's the whole issue of how to value the membership interest if the S Corp is purchasing it rather than being granted it. We had to get a business valuation done which cost about $3,500.

Thanks for bringing up state considerations! I'm in Michigan, so I'll have to look into what the fees are here. Do you know if the liability protection is significantly different between sole prop with good insurance vs an LLC?

Michigan is actually pretty reasonable - filing fee is around $50-75 and annual statement fee is just $25. Much better than California! Insurance and LLCs protect you differently. Insurance covers specific claims up to policy limits, while an LLC creates a legal separation between business and personal assets. Even with good insurance, as a sole prop, someone could still come after your personal assets if they win a judgment exceeding your coverage limits. The LLC creates a legal barrier they'd have to overcome (though not impossible). For graphic design, professional liability insurance is probably more immediately important than an LLC, but having both gives the strongest protection. Many designers start with good insurance, then form an LLC once profits justify the additional paperwork.

The QBI deduction phases out though, right? I think once you make over a certain amount it starts to disappear?

I've thought about it but wasn't sure if my situation warranted a CPA. Would you mind sharing roughly what you paid for that service? And did they help specifically with tax-loss harvesting strategies or more general tax planning?

I paid around $350 for the initial consultation and tax plan development, and then about $400 for each year's tax return preparation. Considering he saved me over $8,000 in taxes through better loss harvesting strategies and finding missed deductions, it was absolutely worth it. He specifically helped with creating a tax-loss harvesting strategy across multiple years, identifying which specific investments to sell when, and properly documenting everything for the IRS. He also advised on how to structure my investments going forward to be more tax-efficient. For someone with $207k in losses like you have, the potential tax savings would likely be much higher than what I experienced.

Not OP, but I'm guessing crypto or maybe options trading. Those are usually the culprits when you see wild swings like $267k gain followed by $210k loss. Regular stock investing rarely produces that kind of volatility unless you're heavily concentrated in a few speculative stocks.

It was a combination of factors. I had a concentrated position in a few tech stocks that did extremely well in 2022, and I got overconfident. In 2023, I started trading options with larger positions than I should have, and then doubled down when things started going south. I also had some crypto that crashed. The perfect storm basically. I've definitely learned my lesson about diversification and position sizing. I'm working with much smaller position sizes now and have moved a significant portion of my portfolio to index funds. Still have some individual stocks but with strict limits on how much I allocate to any single position.

Thank you for this! That's actually really good to know. So I did the right thing by filing even though I can't pay right now. Do you know if there's any way to get the penalties waived? I read something about "first time abatement" somewhere.

Yes, there is a First Time Penalty Abatement that the IRS offers if you haven't had any penalties in the past 3 tax years. You usually need to call and request it, and they don't automatically tell you about it. It won't waive the interest, but it can remove the failure-to-pay penalties. Definitely worth asking for if this is your first time owing or being late with payment. You typically need to have paid the tax or set up a payment plan before requesting the abatement.

I did this last year. The processing fee was around 2% of the tax amount. My credit card had 22% APR, while the IRS interest rate was like 6-7%. So unless you can pay off that credit card REALLY fast or have a 0% intro offer, the IRS plan is usually cheaper.

Is it even worth claiming home office then? I've heard it reduces your mortgage interest deduction and complicates selling your house later because of capital gains implications. Some of my friends say to avoid it completely.

I didn't make any special elections, so I guess it's the default (sole proprietorship)? Is that bad? Should I have chosen S-Corp instead?

For your first year with more expenses than income, the default sole proprietorship treatment is actually perfect! This allows your business losses to directly offset your W-2 income on your personal return. If you had elected S-Corp status, the rules for how losses flow through would be more complicated and potentially less beneficial in this startup phase. As your business becomes profitable, S-Corp status might make sense to save on self-employment taxes, but for now, you're in the ideal structure to maximize the tax benefit of your startup losses. You made the right choice by sticking with the default!