That's a great point about the tax software! Which software are you using that gives you trouble with blank 199A sections? I'm using ProSeries right now.

I've had this issue with both UltraTax and Lacerte in previous years. ProSeries is actually a bit better about this particular situation, but you might still get a "soft" warning that you can override. For ProSeries specifically, you can usually bypass these warnings without entering zeros, but I've found that checking the box that says "QBI Not Applicable" in the 199A section often prevents the warnings altogether. The software is getting better each year at recognizing these situations, but it's still not perfect.

This is correct! I just checked the draft instructions for 2023 and they maintain the same guidance. There's a checkbox specifically for "all partners are C-Corps" that needs to be marked, but then you can skip the rest of the 199A calculations.

Thanks for this tip! Does it matter what method I use to track expenses? Like can I just keep a spreadsheet or do I need special software? Also, for the home office deduction, is it better to do the simplified method or the regular one?

A simple spreadsheet works perfectly fine for tracking expenses - just make sure to keep all receipts too (digital copies are okay). I personally use a Google Sheet where I log the date, amount, vendor, and category of each expense. Some people prefer apps like QuickBooks Self-Employed or FreshBooks, but they're not necessary when you're just starting out. For the home office deduction, it really depends on your situation. The simplified method is just $5 per square foot up to 300 square feet (max $1,500 deduction), which is super easy. The regular method can potentially get you a larger deduction if you have a big office or high home expenses, but requires much more detailed record-keeping and calculations. I'd start with the simplified method your first year, then see if it's worth doing the math for the regular method next year.

You can still catch up! Make a payment now that covers what you should have paid for Q1 (April) and Q2 (June). Then stay on track with Q3 (Sept) and Q4 (Jan). You might face a small penalty for the late payments, but it's WAY better than waiting until tax time to pay it all! The penalty is basically an interest charge.

What about if some of my sales are direct through my website where I have to collect and remit the tax myself? Do I treat those differently than the Ebay collected ones?

For sales through your own website, you'll use the same principles but with a few extra steps. You'll still record the collected sales tax in a liability account (not income), but since you're responsible for remitting it yourself, the balance won't automatically zero out like with Ebay. You'll need to regularly (monthly, quarterly, or annually depending on your state requirements) transfer that money to the appropriate tax authorities. When you make those payments, you'd record them as drawing down from your sales tax liability account. This keeps your income clean and gives you a clear record of your tax collection and remittance activities.

I've been using TaxJar for this and it's been pretty helpful for tracking all the different state thresholds. The economic nexus rules are such a pain to keep up with manually.

Code "1" on a 1099-R generally indicates an early distribution with no known exception, which means the custodian (Vanguard in this case) is basically telling the IRS "this person took money out early and we don't know of any exception that would exempt them from the penalty." Code "7" indicates a normal distribution, which wouldn't trigger the 10% penalty automatically. The different code does make a significant difference in how the IRS initially processes the form. If you complete a proper rollover, you'll need to report it correctly on your tax return to override what the 1099-R is indicating. Most tax software has specific sections for handling rollovers that will guide you through this.

This is really helpful perspective. What about bank statements? Should I be providing my entire bank statements from the year or just the transactions they're asking about? I'm worried about them seeing other stuff that might trigger more questions.

That's really good advice about the cover sheets - I wouldn't have thought of that. Did you end up owing additional tax after your audit was completed? I'm worried they're going to disallow all my legitimate business expenses.

I did end up owing a little more, but nowhere near what I feared. They disallowed about $2,100 of my $19,500 in business deductions because I couldn't find adequate documentation for some meals and entertainment expenses. My well-documented home office and equipment deductions were accepted without issue. The cover sheets definitely helped - the auditor actually commented on how easy I made their job. Each sheet listed the category (like "Home Office"), total amount claimed, how I calculated it, and an itemized list with all supporting documents attached. I even included IRS publication references showing why each deduction qualified. It turned what could have been multiple sessions into just one 2-hour meeting.