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My sister went through almost the exact same situation with her adopted son. What worked for her was submitting Form 8862 (Information To Claim Certain Credits) along with a detailed letter explaining the circumstances and documentation from the adoption agency confirming the dates of placement and finalization. She also included affidavits from her social worker and pediatrician confirming they had been seeing the child since placement. The IRS eventually approved her claim after initial rejection. The key was persistence and overwhelming documentation from multiple sources.
That's really helpful info! Did she have to go through multiple appeals or did they accept everything after the first detailed submission with the Form 8862?
It took two submissions. The first one was rejected with a form letter, but she called (after struggling to get through) and spoke with an agent who advised her to resubmit with even more documentation and a more detailed timeline of the birth certificate delays. The second submission included everything from the first plus school enrollment records, health insurance coverage documentation, and a more detailed letter citing specific sections of the tax code related to qualifying children. That one was finally approved, though it took about 4 months to process.
Have you tried contacting your state's taxpayer advocate? They can sometimes help navigate these situations, especially when there are extenuating circumstances like yours. They might be able to help identify exactly what documentation the IRS needs to approve your claim. Also, just a personal experience - we had a somewhat similar situation with our kinship placement and eventually got our credits after appealing, but it took almost 8 months and multiple submissions. Don't give up!
As someone who's been audited for exactly this type of situation, let me offer some practical advice: 1) Business purpose is everything. If you buy a $130k luxury vehicle primarily for the deduction rather than because it genuinely serves a necessary business function, you're asking for trouble. 2) Keep meticulous records of every property you visit, meeting you take, and business mile you drive. I use an app that logs all my business trips automatically. 3) Consider a cost-benefit analysis. Even if you could get the deduction (doubtful given passive activity loss limits), is the administrative burden and audit risk worth the tax savings? 4) Talk to someone who specializes specifically in taxation for physicians with real estate investments. Generic CPAs often miss the nuances here. Just my two cents from someone who learned the hard way!
What happened with your audit? Did you end up having to pay back taxes plus penalties? I'm considering a similar strategy but worried about the consequences if it doesn't work out.
The audit was brutal. They disallowed about 70% of my claimed business expenses, including most of the vehicle depreciation, because my documentation wasn't sufficient to prove predominant business use. I had to pay back taxes, interest, and a 20% accuracy-related penalty. The biggest issue was that I couldn't demonstrate I was spending enough time in real estate activities to justify such a large vehicle expense, especially given my full-time medical practice. The IRS agent specifically noted that my income level made the large loss suspicious. They applied the hobby loss rules and reclassified much of my activity as passive. The total hit was around $45,000 including professional fees for representation during the audit.
Have you considered a 1031 exchange into opportunity zones instead? Much cleaner tax advantages than trying to create losses. My practice income is similar to yours, and I've found that investing in actual rental properties in opportunity zones gives me better tax benefits without raising the same red flags.
One thing nobody has mentioned yet about MMLLC vs S-corp - operating agreements are SUPER important, especially with 4 partners. Make sure you have detailed provisions for: - How profits/losses are allocated (doesn't have to be equal to ownership %) - What happens if someone wants out - Management responsibilities and voting rights - Capital contribution requirements My brother-in-law's multi-member LLC imploded because they didn't have this stuff spelled out clearly. The tax structure matters, but the operating agreement will save you major headaches.
This is really helpful! We have a basic operating agreement drafted but haven't addressed the profit/loss allocation part in detail. Would you recommend getting a specialized business attorney to help with this, or are there good templates we could use as a starting point?
I would absolutely recommend getting a specialized business attorney for this. Templates are a starting point, but with four partners and potentially complex profit-sharing arrangements, you need customization. The attorney cost us about $1,500 for a solid operating agreement, but it was worth every penny. For your escape room business, you'll want specific provisions that address how to handle capital-intensive improvements, marketing expenses, and the sweat equity some partners might contribute versus purely financial investments. The attorney can also help structure things to maximize the tax benefits whether you go MMLLC or S-corp route. Think of it as insurance against future partner disputes.
A practical tip from someone who runs 2 escape rooms: regardless of whether you go MMLLC or S-corp, set up good bookkeeping from DAY ONE. Our first year was a nightmare at tax time because we mixed personal and business expenses and didn't track properly. QuickBooks Online worked well for us, but there are cheaper options like Wave that are good too. Just make sure you're categorizing everything correctly and keeping good records of all your startup costs (which can be substantial for escape rooms with all the props and tech).
For what it's worth, I went through something similar and found out it's pretty common with gig work. Your W-2 withholding is probably correct, but the issue is that you need to be making quarterly estimated tax payments on your 1099 income. When you're seeing that big refund before entering your 1099, it means your W-2 job is withholding correctly for THAT income only. But once you add the 1099 income, you owe additional taxes that weren't withheld. I solved this by setting up automatic transfers of 25-30% of my DoorDash deposits into a separate savings account for taxes. Then I make quarterly payments using the IRS Direct Pay system.
How do you figure out what percentage to save for quarterly payments? I do Instacart and have been just guessing and usually end up owing at tax time anyway.
I started with 30% as a safe estimate (covers both income tax and self-employment tax for most people). Then after filing my first full year of taxes with gig work, I calculated my effective tax rate on just the 1099 income. For me personally, it worked out to about 27% when considering federal, state, and self-employment taxes. But this varies based on your total income, tax bracket, deductions, and which state you live in. If you're eligible for a lot of deductions (like mileage for Instacart), you might need to set aside less.
One thing no one mentioned - check if you changed your W4 in the past year or if your employer updated their payroll system. My company switched payroll providers last year and somehow my withholding got WAY messed up (too much taken out) even though I didn't change anything on my W4. If you do wanna adjust your W4 to have less taken out from your regular job, use the IRS Tax Withholding Estimator online. It lets you put in both W2 and 1099 income to give you the right withholding.
That's a good point - my company did actually change their payroll system around October last year! I just checked my final paystub from 2023 and compared it to my 2022 W-2, and it looks like they withheld about $2,800 more in 2023 than in 2022, even though my salary only went up by about $4,000. That explains a lot!
Everett Tutum
Something similar happened to me in 2022. In my case, the IRS was counting EVERY transaction in my payment processor as income - including refunds I issued, transfers between accounts, and even money I was holding for my business partner. Call the Taxpayer Advocate Service at 877-777-4778. They're an independent organization within the IRS that can help with these kinds of issues. They assigned me a case advocate who sorted everything out within a month.
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Peyton Clarke
β’Thank you for this suggestion! I didn't even know the Taxpayer Advocate Service existed. Did you need to provide special documentation to them, or just explain your situation?
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Everett Tutum
β’I had to provide pretty much everything - bank statements, my complete Venmo transaction history, my tax return, and the deficiency notice. The more documentation you have ready, the faster they can help. Make sure to explain that this is causing you significant financial hardship (which I'm guessing it is, given the amount). That helps them prioritize your case. They're understaffed but they really do try to help if they can see clear evidence that the IRS made a mistake.
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Sunny Wang
Update us on what happens! I've been dealing with a similar issue for 8 months now and still haven't gotten it fully resolved. Make sure to keep detailed notes on every conversation, including the ID number of every IRS employee you talk to.
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Hugh Intensity
β’This 100%. Document EVERYTHING. I had to reference previous conversation IDs several times during my deficiency dispute. Also send everything via certified mail so they can't claim they never received your documentation.
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