How much did appealing cost you? My CPA is charging $250/hour, and he estimates it would take at least 10-15 hours to prepare and handle an appeal. That's potentially $3,750, and with no guarantee of success. I'm trying to figure out if it's worth the fight or if I should cut my losses.

For my first audit appeal, I handled it myself and spent about $500 on organizing documents and preparing my case. It took about 25 hours of my time, but I saved almost $8,000 in disallowed deductions. For the second appeal, I hired a tax attorney for a flat fee of $2,500. This was more complex involving rental property deductions. We ended up saving about $12,000 in taxes, so the investment was worth it. The key is analyzing the potential savings versus the cost of fighting. If your total tax difference is less than $5,000, self-representation might make more sense. For larger amounts, professional help often pays for itself. Remember that if you win, you're not just saving the immediate tax bill but also setting precedent for future years of similar deductions.

Not OP, but this is important info. Many people don't realize that employee business expenses (including home office for W-2 employees) are completely suspended right now. The only workaround is if your employer would provide an accountable plan where they reimburse you for these expenses.

Do you need to have a business bank account to do the separate credit card thing? Or can you just use a personal card that you designate for business only?

You can absolutely use a personal credit card that you designate for business only - that's what I do! You don't need a formal business account unless you have an LLC or corporation. The key is consistency - just make sure you ONLY use that specific card for business expenses and nothing personal. Makes it super easy to download your year-end statement and have all your deductions in one place. I also take photos of receipts for cash expenses using a free app that organizes them by date.

That's a really helpful rule of thumb! I had no idea how much to set aside. If I start setting aside 30% of my freelance income going forward, should I just make quarterly payments with that? And when are those even due?

Exactly - set aside that 30% and make quarterly estimated tax payments with it. The quarterly due dates are April 15, June 15, September 15, and January 15 of the following year (for 2025, the dates would be April 15, 2025, etc.) You can pay online through the IRS Direct Pay system or through their EFTPS (Electronic Federal Tax Payment System). Either way works fine. Just make sure you select "estimated tax" as the payment reason. Some freelancers I know set calendar reminders a week before each due date so they never miss one.

This! Depreciation recapture bit me hard when I sold my rental last year. I didn't realize I'd have to pay back all those tax benefits at 25% rate. Would have made different decisions if I'd understood this from the beginning.

Thank you for mentioning this! We do hope to eventually move into this house, maybe in 2-3 years once my husband's employment stabilizes. Is there any documentation I should keep now to help with this potential future situation?

Keep absolutely everything! Save all records related to: - Your original purchase (closing documents, original intent to occupy) - Any emails or documentation showing your plans changed due to job loss - All rental income and expense records - Any improvements or repairs (with receipts) - Property tax statements showing separate land/building values - Documentation of when you begin using it as your primary residence Also consider getting a professional appraisal when you convert it back to personal use. Having solid documentation of the property's value at each conversion point can save you thousands in taxes when you eventually sell.

Thanks for sharing your experience! When you say Schedule C might be better, does that mean you believe the education would qualify as a legitimate business expense under T Reg 1.162-5(a) for someone in this situation?

Yes, I believe it would qualify as a legitimate business expense in this specific case. The key is that T Reg 1.162-5(a) allows deductions for education that "maintains or improves skills required by the individual in his employment or other trade or business." If your client can document that they regularly perform accounting functions in their law practice (like tax planning, financial analysis for clients, etc.), then the CPA education enhances existing skills rather than qualifying them for a new profession. It's the actual tasks performed that matter, not the job title. I successfully took this position on my own return and have advised clients similarly without issues.

I don't think you can double-dip like that. IRS Publication 970 specifically says you can't claim an education credit and a business deduction for the same expense. You have to choose one or the other.

Can you explain more about this Accumulated Earnings Tax? I've never heard of it but might be in a similar situation with my business. Is there a way to document plans for the retained earnings to avoid this tax?

Yes, you can document specific plans for using the accumulated earnings to avoid the tax. The IRS looks for "reasonable needs of the business" - things like expansion plans, equipment purchases, research and development, or contingency funds for specific business risks. The key is having a concrete plan, not just a vague notion of "future growth." Documentation is crucial - board meeting minutes approving a specific expansion plan with estimated costs, for example. For an investment business, you could document plans to make specific types of larger investments that require accumulated capital. Just be aware that "investing in the market" isn't typically considered a reasonable business need since that's what investment companies do by default.

That's concerning and something I hadn't come across in my research. Between this PHC tax and the Accumulated Earnings Tax mentioned above, it sounds like there are multiple ways the IRS can penalize a C-corp used primarily for investments. Would an LLC taxed as an S-corp help avoid these specific issues while still potentially reducing self-employment taxes?

Exactly - the LLC taxed as an S-corp would avoid both the PHC tax and Accumulated Earnings Tax issues completely. S-corps are pass-through entities, so there's no concept of "undistributed earnings" at the corporate level to tax. The S-corp approach can help reduce self-employment taxes because you can split your income between salary (subject to SE tax) and distributions (not subject to SE tax). Just be careful - your salary must be "reasonable" for the services you provide. For an investment business where your active participation might be limited, this benefit could be minimal since most of your income might be considered passive already and not subject to SE tax regardless of structure. Talk to your accountant about the "material participation" tests for your specific situation to determine whether your investment activities would qualify as active or passive income.