Do capital losses offset the Net Investment Income Tax as well? I had some gains but also some pretty big losses this year.

Yes, capital losses do offset gains before calculating the Net Investment Income Tax. The NIIT applies to your "net" investment income, so losses are factored in before determining if this additional tax applies. If your losses exceed your gains, you can use up to $3,000 of the excess to offset your ordinary income, and any remaining losses can be carried forward to future tax years. This can be a helpful strategy if you're near the NIIT threshold.

That's a really good point. Does anyone know which states don't tax capital gains? I'm thinking about moving soon and this could be a factor.

That's right! Tax-free states include Florida, Texas, Washington, Nevada, Alaska, Wyoming, South Dakota, New Hampshire, and Tennessee. There are also states with special treatment for capital gains like Arizona and Montana that offer partial exclusions in some cases. But watch out for other taxes these states might have instead - some have higher property taxes or sales taxes to make up for the lack of income tax. Total tax burden is what really matters for your bottom line.

Can you share more about how your multi-entity structure works? We're considering doing something similar but worried about the complexity and potential issues with IRS.

It's not a perfect solution, but we created a separate entity that holds our intellectual property and handles R&D activities. This allows us to better isolate the Section 174 expenses and manage the tax implications more effectively. The operational entity pays the R&D entity for development services. This approach does have significant complexity and costs in terms of legal structure, transfer pricing considerations, and ongoing compliance. You need good tax and legal advisors to set it up properly. The structure works better for established companies than very early startups due to the overhead involved.

Don't do it! We looked into this extensively. Moving overseas for Section 174 reasons actually backfires because foreign R&D must be amortized over 15 years instead of 5 years for domestic R&D. The cash flow impact is even worse.

That's a great point about explaining the change in reporting method. Do you think I should file any kind of formal notification about the change, or just include a note with my return?

No formal notification is needed for this type of change. Just include a simple note with your return explaining that due to significant growth in inventory purchases (from under $15k to $189k), you've switched from reporting inventory in Other Expenses to using the proper COGS section. It's not technically a change in accounting method that requires approval - you're just moving to the correct reporting format based on your business growth. But the note helps provide context to anyone reviewing the return.

Not the OP, but I do similar with my seasonal product business. I essentially make one big purchase in spring, sell throughout summer/fall, and deliberately clearance anything remaining in December so I start January with clean books. Works great for tax purposes!

I run a specialty equipment resale business focusing on two product lines that have predictable seasonal demand. I intentionally time my purchasing to match that demand cycle and use progressive discounting in the final months to ensure I sell through everything. For the few items that don't sell, I either use them as promotional giveaways for next season's marketing or donate them (with proper documentation for the deduction). It's not always perfectly zero inventory, but it's usually within a few hundred dollars by year-end.

How do you track your mileage? Do you use an app or just write it down? I always forget to log my trips and then try to recreate it later which is probably not ideal for documentation.

I use the MileIQ app on my phone. It automatically tracks all my driving and then I just swipe left for personal trips and right for business trips at the end of each day. Takes seconds and creates an IRS-compliant log automatically. For those who prefer manual tracking, keep a small notebook in your car and jot down the odometer reading at the start and end of each trip, along with the date and purpose. The key is consistency - the IRS wants to see a complete log, not just estimates or recreated records.

I did one last year and yes, the timing rules are EXTREMELY strict. You have 45 days from selling your property to identify potential replacement properties in writing, and 180 days total to complete the purchase. NO EXCEPTIONS. Also, you MUST use a qualified intermediary to hold the funds - you can't touch the money yourself or it blows up the whole exchange. And the replacement property has to be of equal or greater value to defer all the gain. We almost messed up because we didn't realize you have to identify specific properties within that 45-day window.

I'm a graphic designer, so I spend 8+ hours a day at the computer. My thoracic outlet syndrome definitely flares up from all the computer work - that's actually how I developed it. The massage therapy helps me continue working without severe pain. Do you think that would qualify as a business expense? That would be amazing if so!

Yes, that situation has a much stronger case for being a legitimate business expense! Since your condition is directly aggravated by your work activities (extended computer use for graphic design) and the massage therapy allows you to continue working, you can make a strong argument for it being "ordinary and necessary" for your business. Keep detailed records showing the connection between your work and the need for treatment. Have your doctor document that the massage therapy is specifically treating a condition caused or worsened by your work activities. This documentation is crucial if you're ever audited. Also track how the treatment directly enables you to continue your business activities. This approach could save you significantly more than the medical expense deduction route since it directly reduces your self-employment income and tax.

Yeah but you can only set up an HSA if you have a high-deductible health plan. Not everyone qualifies. And FSA is use-it-or-lose-it which is super risky if you're not sure exactly what medical expenses you'll have.