I use QB for my pottery business. It can track COGS but you have to set it up correctly first! Make sure you classify your items properly as inventory items rather than non-inventory, and enable the inventory tracking feature. Then when you purchase materials, you'd post to inventory asset accounts, not expense accounts. When you sell, QB will automatically calculate COGS.

But aren't there legitimate advantages to being a contractor? I've heard you can deduct all kinds of things as business expenses - home office, car, phone, even meals sometimes. Couldn't those deductions make up for the extra taxes?

There are some legitimate advantages to being a contractor, but they rarely outweigh the costs for most workers. Yes, you can deduct business expenses, but there are strict rules about what qualifies. Home office deductions require exclusive use of that space for business. Vehicle deductions only apply to business use, not personal or commuting. Meal deductions are limited to 50% and must be directly related to business. These deductions rarely offset the additional 7.65% self-employment tax burden, loss of unemployment benefits, lack of workers' comp protection, no paid time off, and no employer-provided health insurance. Plus, you take on all the administrative burden of tax filings, estimated quarterly payments, and keeping meticulous records. For most personal assistants, employee status is financially advantageous unless the contractor rate is significantly higher.

The 20-factor test is actually outdated. The IRS now uses a simplified approach with three categories: Behavioral Control, Financial Control, and Relationship of the Parties. Much easier to understand than the old system. https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee

This is super helpful! Does this ordering change at all depending on whether you're dealing with federal vs. state tax issues? I'm trying to figure out where state tax court decisions fit in this hierarchy.

Great question! For state tax issues, you'd have a parallel hierarchy, starting with the State Constitution, then State Statutes, State Regulations, State Revenue Rulings, etc. For conflicts between federal and state tax law, federal law generally prevails due to the Supremacy Clause of the U.S. Constitution, but states have significant autonomy in creating their own tax systems. State tax court decisions would only be authoritative for that state's tax laws and wouldn't impact federal tax law interpretation.

IRS Notices and Announcements generally fall below Revenue Procedures in the hierarchy. They're considered "official pronouncements of tax policy" but don't have the same weight as Revenue Rulings or Revenue Procedures. That said, Notice 2020-75 specifically is pretty influential regarding state and local tax (SALT) workarounds since it announced the Treasury's intent to issue regulations on a particular matter. If your tax preparer is citing it, it's probably relevant to your situation, but just know that if it ever directly conflicted with a statute or regulation, those higher sources would prevail.

What documentation did you show for the business vs personal use percentage? Did you still track every trip or just estimate based on the typical usage pattern?

I used a combination of methods. I didn't log every single trip, but I did keep good records of my regular business travel patterns. I maintained a work calendar with client appointments and locations, and I'd note my starting/ending odometer readings for those days. For recurring trips (like going to the same client site every Tuesday), I documented the mileage once and then used my calendar to show how many times I made that trip. My tax guy said this is acceptable as long as it's consistent and reasonable. The key was being able to show both the business purpose and the frequency/pattern of travel. I also kept all maintenance records showing odometer readings which helped establish total miles driven.

I went through an audit two years ago where they questioned my vehicle expenses. I had used the actual expense method but my documentation was pretty spotty. The auditor disallowed about 30% of my deduction because I couldn't adequately prove my business use percentage. They wanted to see contemporaneous records (created at the time of the trips), not just estimates after the fact. My advice: start keeping better records NOW, even if you haven't been doing it before. Apps make it much easier these days.

Wait, I thought Section 1231 losses always get ordinary loss treatment regardless of holding period? Isn't the 1 year+ holding period just for determining if gains get capital gains treatment? I've been doing my taxes wrong if that's not the case!

You're right that Section 1231 losses are treated as ordinary losses regardless of holding period. I should have been more precise in my explanation. What I was referring to is that to qualify as Section 1231 property in the first place, the property must be used in a trade or business and held for more than 1 year. Since the OP has held it for 2 years as a rental, it qualifies as Section 1231 property. If it had been held for 1 year or less as a rental, it wouldn't qualify for Section 1231 treatment, and would instead be subject to ordinary income/loss rules for property not used in a trade or business.

I actually haven't heard of cost segregation before. That sounds really useful! Is it something I could still do now even though I've already been depreciating the property as a whole for 2 years? Or is it too late to change how I've been handling the depreciation?