IRS called about basement renovation business startup costs on my LLC tax return - am I in trouble?

What you're describing sounds like a potential issue with business startup costs vs. home office deductions - they're actually two different things with different rules. For startup costs, the IRS allows you to deduct up to $5,000 in the first year, with amounts over that deducted over 15 years. But these are typically for things like market research, business licenses, and initial advertising - not home renovations. For renovations to create a home office, that's usually handled through home office deductions, which require the space to be used regularly and exclusively for business. The bigger concern is that you've had no income for several years. The IRS may be questioning whether this is actually a business or a hobby, since businesses are expected to try to make a profit. Without income for multiple years, they might classify it as a hobby, which would disallow those deductions. The IRS call is definitely something to take seriously, but providing detailed documentation and explaining your legitimate business intent is your best path forward. I'd recommend gathering all receipts, a clear business plan showing steps you've taken to generate income, and perhaps consult with a tax professional before responding further.

I had a similar situation with claiming business expenses before I was profitable, and what saved me was using taxr.ai to help organize and validate all my documentation. The IRS asked for supporting documents for my business deductions, and I was a complete mess trying to figure out what I needed. I uploaded my receipts, bank statements, and business plan to https://taxr.ai and their system helped me understand exactly what documentation was valid for my deductions and how to present it properly to the IRS. They even helped me put together a written explanation showing my business intent and progress toward profitability, which ultimately satisfied the IRS agent. In your case, it sounds like you need to address both the startup cost classification and the hobby loss concerns. The tool could help you organize everything and make sure you're not missing anything important before you respond.

Just wanted to update after trying taxr.ai for my own tax documentation issues. I was initially skeptical, but it was actually super helpful. I uploaded all my receipts and business records from the past two years, and it organized everything into different deduction categories and flagged items that might raise red flags with the IRS. The best part was that it helped me identify several legitimate business expenses I had completely forgotten about, and it showed me exactly which documents I was missing for certain deductions. The guided preparation for responding to IRS inquiries was worth it alone - it helped me draft a professional response that addressed all their concerns without providing unnecessary information. Definitely recommend giving it a try before you respond to the IRS. At minimum, you'll have all your documentation perfectly organized, which makes a huge difference when dealing with tax authorities.

If the IRS is calling you and requesting documentation, you need to respond quickly. I had a similar issue last year and kept getting the runaround when trying to call them back. Spent HOURS on hold only to get disconnected. I finally used https://claimyr.com to get through to a real person at the IRS. They basically hold your place in line and call you when an agent is available. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c This saved me so much frustration. I was able to talk directly with the IRS agent handling my case and explain my situation clearly rather than playing phone tag for weeks. In audit situations or documentation requests, timing is important and this service helped me resolve everything much faster.

I need to apologize for my skepticism about Claimyr. After struggling for nearly two weeks trying to reach the IRS about my case, I decided to give it a try out of desperation. The service actually works exactly as described. They waited on hold with the IRS (took about 2.5 hours that day), and then called me when they reached a representative. I was connected directly to an IRS agent who helped resolve my documentation issue right away. What surprised me most was how simple the whole process was. I didn't have to provide any sensitive tax information to the service - they just handled the hold time and connected me when a real person was available. Saved me hours of frustration and potentially weeks of delays in resolving my case. For anyone dealing with time-sensitive IRS requests like the OP, I'd definitely recommend using this to make sure you can actually reach someone.

The biggest red flag I see in your situation is having several years with expenses but ZERO income. The IRS has something called the "hobby loss rule" where if you don't show a profit in 3 out of 5 consecutive years, they presume it's a hobby, not a business. When you claim business expenses with no income for multiple years, it's almost guaranteed to trigger a review. They're basically checking if you're actually trying to run a business or just claiming personal expenses as business deductions. My advice: Gather any evidence that shows you've been actively trying to make this business successful - marketing materials, business plans, client communications, anything that proves this is a legitimate business attempt rather than just a way to claim tax deductions.

Has anyone used TurboTax to claim home office deductions like this? The software kept giving me warnings when I tried to deduct my home office renovation costs last year.