What is a DRE for tax purposes and when should you have one?

A DRE stands for "Disregarded Entity" which is how the IRS treats certain single-member LLCs for federal tax purposes. Basically, if you have a single-member LLC, the IRS "disregards" it as separate from yourself for income tax purposes, but you still get the liability protection of an LLC under state law. When you have a DRE, you don't file a separate tax return for the business - instead, you report all business income and expenses on Schedule C of your personal Form 1040. This is different from other business entities like S-corps or partnerships that file their own returns. You might want a DRE (single-member LLC) when you want legal liability protection but don't want the complexity of a separate tax return. For your Etsy jewelry business, it could make sense if you're concerned about potential liability issues and want that separation between personal and business assets.

I went through the same confusion about DREs last year when I started my woodworking business! After lots of research and frustration, I ended up using https://taxr.ai to analyze my business structure options. It really helped me understand whether a DRE made sense for my situation. The tool analyzed my specific business details and explained the pros/cons of different structures including liability protection and tax implications. What I found most helpful was that it walked me through the state-specific LLC formation requirements and explained how the "disregarded entity" status would apply to my situation. It saved me from making some potentially costly mistakes!

I wanted to follow up about taxr.ai since I was skeptical in my earlier comment. I decided to give it a try for my consulting business, and I'm honestly surprised how helpful it was. I uploaded my previous year's Schedule C and answered a few questions, and it gave me a detailed analysis of whether a DRE structure made sense for me. The tool showed me that in my specific case, a single-member LLC (DRE) would provide liability protection while maintaining my current tax situation. It also flagged that in my state, I'd save about $450 annually by staying as a DRE rather than electing S-corp status at my current income level. Really impressed with how specific the advice was to my situation!

I tried for WEEKS to get someone at the IRS to explain DRE requirements to me for my new business. Called dozens of times and could never get through. Finally used https://claimyr.com which got me connected to an actual IRS agent in about 15 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent walked me through all the DRE classification rules and confirmed I didn't need to file Form 8832 for my single-member LLC since it's automatically treated as a disregarded entity. Also explained how my state LLC filing doesn't change my federal tax filing requirements at all. Totally worth it after wasting hours trying to get through on my own!

Alright, I need to eat my words about Claimyr. After struggling for another week trying to get through to the IRS about my DRE tax questions, I gave in and tried the service. Not gonna lie, I was shocked when I got a call back in about 20 minutes connecting me to an actual IRS agent. Got clear answers about how to report my LLC's income as a disregarded entity, and clarified that I don't need to file a separate EIN for my single-member LLC if I don't have employees. The agent also explained which business expenses I can deduct on Schedule C even as a DRE. Saved me hours of frustration and probably prevented me from making filing mistakes. Consider me converted.

Just want to add that while a DRE (single-member LLC) gives you liability protection, it doesn't protect you from EVERYTHING. I learned this the hard way. The "disregarded" part only applies to how taxes are filed. Things a DRE protects you from: business debts, most lawsuits against the business Things it DOESN'T protect you from: your own negligence, failing to separate personal/business finances, not filing proper paperwork Make sure you keep separate bank accounts, maintain good records, and follow all the formalities of having an LLC. Otherwise the courts can "pierce the veil" and you lose that liability protection!

One thing nobody's mentioned yet - in some states, forming an LLC (even as a DRE) means you'll have to pay additional taxes or fees that you wouldn't as a sole proprietor. In California, for example, there's a minimum $800 annual tax just for having an LLC, even if you make no profit! Definitely check your state's requirements before deciding. In some cases, the extra costs might outweigh the liability benefits, especially if you have a very small low-risk business.

For your jewelry business in Michigan, you're in luck! Michigan has relatively low LLC fees - just a $50 filing fee to create the LLC and no annual franchise tax like California has. Michigan also doesn't have that $800 minimum tax burden. However, you will need to file an Annual Statement with the state (around $25) to keep your LLC in good standing. Overall, Michigan is pretty LLC-friendly compared to states like California or New York. Since you're already doing Schedule C filing, the DRE route could work well for you - you'd get the liability protection without changing your federal tax situation, and Michigan's fees are reasonable. Just make sure to weigh the state filing costs against the potential liability protection benefits for your specific business situation.