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Always get a second opinion when in doubt! I had an accountant once who insisted I couldn't take the home office deduction because I also had a full-time job. Turns out he was totally wrong - if you're self-employed even part-time, you can absolutely take that deduction for the portion of your home exclusively used for that business. Found a new accountant and saved over $1,000.
Did you find the new accountant through a referral or did you just search online? I'm thinking I might need to do the same thing but I'm not sure how to find someone reliable.
I got a referral from a coworker who also does freelance work on the side. Personal referrals are definitely the way to go if possible since online reviews for tax professionals can be hard to trust. If you don't have any personal referrals, I'd recommend looking for an Enrolled Agent (EA) rather than just any tax preparer. They're specifically licensed by the IRS and tend to be more knowledgeable about tax code than the seasonal preparers at big chain tax services. Local small business associations sometimes have lists of reputable tax pros who work with self-employed individuals.
Have you checked if your accountant is actually calculating your Qualified Business Income deduction correctly? With your freelance income, you should be eligible for the QBI deduction which is up to 20% of your qualified business income. This is something a lot of tax preparers overlook or calculate incorrectly.
Your tax guy is probably right, but there's a middle ground option you might consider. You can set up an installment agreement with a very small monthly payment (like $25) while your tax pro continues to resolve the actual issue. This typically stops collection activities including levies, gives you a formal agreement with the IRS, but doesn't require you to pay the full incorrect amount. If your accountant resolves it in your favor, you can get refunded for whatever small payments you made. I went through almost exactly this same situation when my employer issued a corrected W2 but the IRS assessment was based on the original incorrect one. My accountant was working on it, but I couldn't sleep at night worrying about levies, so the small installment payment was my compromise solution.
That's an interesting approach I hadn't thought of. Wouldn't setting up a payment plan be seen as accepting that I owe the amount though? I'm concerned it might complicate things if we're simultaneously arguing that we don't actually owe this money.
Setting up the installment agreement doesn't mean you're agreeing the amount is correct. The IRS allows you to dispute the underlying tax while still having a payment arrangement in place. You can specifically request that your agreement be processed with "pending audit reconsideration" or "disputed liability" noted on your account. When the dispute is resolved, if it turns out you owe less or nothing, the IRS will refund any excess payments automatically. I made about four $25 payments before my situation was resolved, and I received those payments back with my refund. The peace of mind was worth the temporary $100 out of pocket.
One important thing nobody has mentioned: the CP504 notice isn't the final step before levy! There's still the Final Notice of Intent to Levy (usually Letter 1058 or LT11), which gives you 30 days' notice AND appeal rights before any actual levy happens. The CP504 is definitely designed to scare you, but you still have time and options. Your tax professional is likely aware of this timeline, which might explain why he's not panicking.
This is correct. Having worked at the IRS for 12 years, I can tell you there's a specific sequence of notices, and CP504 is not the final step. You'll get at least one more notice with appeal rights before any levy action.
My accountant told me something important about software deductions - make sure your wife keeps a record of when she started actually USING the software, not just when she purchased it. Take screenshots of her first project using it with dates visible. For my business, I had to prove the "in service" date for a major software purchase, and having those dated screenshots saved me when I got a letter from the IRS questioning my deduction timing.
Thanks for mentioning this! Do you know if email confirmation of the download/activation would count as proof? Or do we really need actual project screenshots?
Email confirmations of download/activation are a good start, but they only prove you received the software, not that you actually put it to business use. The IRS specifically looks for evidence of the software being used in your business operations. Project screenshots with visible dates, saved project files with creation timestamps, or even emails to clients mentioning you used the new software on their project can all serve as stronger evidence. I'd recommend keeping several different types of proof just to be safe. My accountant calls it the "belt and suspenders" approach to tax documentation.
Has anyone here actually been audited specifically about software deductions? I'm wondering if the IRS really cares about a $1400 software purchase or if we're all being paranoid. I've been deducting software for years and never had an issue.
I got audited last year and software deductions were absolutely part of what they examined. It wasn't the only thing, but they specifically asked for proof that the $3200 design software I purchased was actually used in my business and when I started using it. They disallowed part of another tech purchase because I couldn't prove I was using it exclusively for business.
5 One thing nobody's mentioned yet - have you considered leasing instead of purchasing? With your income level and business situation, a lease might actually be more advantageous tax-wise since you wouldn't need to worry about the Section 179 income limitation. You could deduct the business percentage of lease payments as ordinary business expenses against future income when your LLC becomes active.
3 Wouldn't leasing have limitations too though? I thought there were luxury auto restrictions on lease deductions as well? Plus don't you lose the potential appreciation of the vehicle as an asset?
5 You're right that there are luxury auto limitations on lease deductions, but they work differently than purchase limitations. With leasing, you can deduct the business percentage of your payments, subject to inclusion amounts for higher-priced vehicles. It's often more straightforward than dealing with Section 179 income limitations. As for asset appreciation - vehicles almost always depreciate rather than appreciate, so that's rarely a concern. In fact, with leasing, you avoid the risk of getting stuck with a rapidly depreciating asset. The main advantage in your situation would be that you don't need immediate business income to start taking some deduction, unlike with Section 179 which requires business profit to utilize fully.
14 Former IRS auditor here. Be VERY careful with this strategy. Taking a full vehicle deduction in an LLC with zero income is a massive red flag for audit. The "business purpose" test is crucial - you need to prove the vehicle is primarily used for legitimate business activities, not personal use disguised as business.
1 This is making me nervous now. Would starting with a cheaper vehicle be less likely to trigger an audit? I was also thinking about an SUV but maybe something in the $45k range instead of $95k?
Noah Irving
I think your calculations look right based on the numbers. I moved from an accountant to doing my own taxes last year and had a similar "sticker shock" moment. Here's a tip I wish someone had told me: whenever you have income that doesn't have taxes withheld (like your interest), you should plan to set aside about 25-30% of it for taxes, depending on your tax bracket. For next year, look into making quarterly estimated tax payments for that interest income. The IRS form is 1040-ES. It'll save you from having a big bill next April and might even save you from underpayment penalties if your total tax due is high enough.
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Benjamin Carter
ā¢Thanks for confirming! Quick question - how do the quarterly payments work? Do I just guess how much interest I'll earn for the year and divide by 4? And if I mess up the estimate, will I get penalized?
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Noah Irving
ā¢Quarterly payments are basically your best estimate divided into four payments. The IRS provides a worksheet with Form 1040-ES that helps you calculate the amount. You can base it on last year's interest if you expect similar amounts, or adjust as needed if you know it will be different. If you underestimate, you might face a small penalty, but only on the difference between what you should have paid and what you did pay. The good news is there's a "safe harbor" rule - if you pay at least 90% of this year's taxes or 100% of last year's tax liability through withholding and estimated payments, you generally won't face penalties even if you end up owing more.
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Vanessa Chang
One thing to consider - are you contributing to any retirement accounts? With your income level, putting money into a traditional 401k or IRA could reduce your taxable income and potentially lower your tax bill. For 2025, you can contribute up to $23,000 to a 401k if your employer offers one, or up to $7,000 to an IRA. Might be worth looking into for next year's taxes, especially since you have substantial interest income that's adding to your tax burden.
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Madison King
ā¢Not OP but I'm in a similar situation. If I max out my 401k at work, does the contribution have to be made before December 31st to count for that tax year? Or do I have until April 15th like with an IRA?
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