Thanks for this advice. We do have a separate business account and have been keeping decent records. Do you think we need to get a CPA involved now or can we wait until we actually have some income to report?

You can probably wait on the CPA if money is tight right now. Focus on maintaining excellent records, tracking everything properly, and documenting your business activities. When you do start generating income or when your personal tax situation gets more complex, that would be the time to bring in a professional. In the meantime, you could look into more affordable tax guidance options like the ones mentioned above, or even free resources through your local Small Business Administration. They often offer workshops on tax planning for creative entrepreneurs.

I had a friend who got audited for this exact issue with his band. Basically, the IRS disallowed all his business expense deductions from previous years and he had to pay back taxes plus penalties. The key was that he hadn't shown any profit in 7 years and couldn't demonstrate serious efforts to become profitable. He didn't have a business plan, proper bookkeeping, or separate accounts. It was a mess.

Thanks for this tip! I'm a bit nervous about using Forms mode since I'm not super confident about the basis calculations. Have you had any issues with TurboTax calculating things incorrectly when you use this method?

I wouldn't recommend Forms mode unless you're very familiar with partnership tax rules. In my experience, filling forms directly can lead to errors with basis calculations since TurboTax won't prompt you for all the information it needs. The safer approach is definitely using the K-1 interview section under "Less Common Income" as others suggested. TurboTax will ask all the right questions about your basis, at-risk amounts, and passive activity involvement there, then properly calculate limitations before populating Schedule E correctly.

Did FreeTaxUSA handle the passive loss limitations correctly though? That's my biggest concern with cheaper tax software - sometimes they miss the complex calculations.

So does that mean if I can't resolve the "potential deficiency" with documentation, my case will end up on a docket record too? At what point does it move from administrative to legal proceedings?

The progression typically works like this: First you get the initial inquiry (CP2000 or similar), then if unresolved, you receive a Statutory Notice of Deficiency (90-day letter). Only after receiving that 90-day letter and then filing a petition with the Tax Court would your case appear on a docket. You have significant opportunities to resolve the issue before reaching the Tax Court stage. Many deficiency issues are resolved during the correspondence audit phase or through the IRS Appeals office. Tax Court is usually the last resort when you and the IRS fundamentally disagree about your tax liability and can't reach a settlement.

You can create an account on the IRS website (irs.gov) and view your tax account transcript. It'll show any assessments, payments, and adjustments to your account. I check mine regularly since I had an issue a couple years ago.

Do you know if there are any major changes to the 2023 version? I heard something about some states changing their credit reduction status but wasn't sure if that would affect the actual form layout.

Based on the draft version, the core form layout is practically identical to 2022. The main differences are in Schedule A where they updated which states have FUTA credit reductions. California has been added to the reduction list this year, and I believe Connecticut's reduction percentage has changed. If you don't have employees in those states, the form will be essentially the same as last year for you.

I switched from QuickBooks to Gusto last year and they're much faster with form updates. Their payroll system automatically calculates your FUTA liability throughout the year and they usually have the new forms implemented within days of IRS releases. Little more expensive but worth it for the peace of mind.

Thanks for the suggestion about FreeTaxUSA! Do they handle everything else TurboTax does? I'm already halfway through my return on TurboTax but maybe I should switch for next year. And is there any downside to skipping Form 1116 when the amount is under the threshold?

FreeTaxUSA handles all the same forms as TurboTax for federal filing at a fraction of the cost. Their interface isn't quite as polished but it gets the job done. Their deluxe version is only about $7 and includes priority support and audit assistance. State returns are extra though. There's no real downside to skipping Form 1116 when you're under the threshold. The only limitation is you can't carry forward unused foreign tax credits, but with just $3, that's not an issue for you. If your foreign investments grow significantly in future years, then you'll want to start using Form 1116.

Is Cash App Taxes actually reliable? I've heard mixed things. Anyone used it for investment stuff? Seems sketchy to trust a free app with complicated tax situations...