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Make sure you also check if you received any forms related to HCTC eligibility that might have been automatically reported to the IRS! My husband got a similar notice because his former employer sent him a PBGC (Pension Benefit Guaranty Corporation) statement that triggered HCTC eligibility flags in the IRS system, even though we never claimed the credit.
Yes! This happened to me too with PBGC forms. The IRS computer systems automatically flag accounts when they receive certain forms, even if you don't claim the associated credits.
Always respond to IRS notices!! Even if you think it's a mistake or doesn't apply to you. I ignored a similar notice once thinking it would be cleared up automatically and ended up with penalties and interest before I finally resolved it.
For what it's worth, I've been doing my duplex taxes on my own using FreeTaxUSA for the past three years. It's WAY cheaper than TurboTax but still handles Schedule E for rentals perfectly fine. I was paying $500+ to a CPA before that, but realized my situation is pretty straightforward. The software walks you through all the rental income, expenses, and depreciation stuff step by step.
Does FreeTaxUSA handle state taxes too? And is it easy to import previous year's info if you're switching from TurboTax?
FreeTaxUSA does handle state taxes, though unlike federal (which is free), there's a small fee for state filing - around $15 depending on your state. Way cheaper than TurboTax's $50+ for state filing. As for importing from TurboTax, unfortunately, you can't directly import the TurboTax file. You'll need to manually enter your information the first year. However, it's not as bad as it sounds since you can use your previous year's return as a guide. After that first year, FreeTaxUSA will remember your info and make future years much easier.
Honestly, with just a single rental unit in a duplex, TurboTax should be fine. I've used it for 5 years with my triplex (live in one, rent two). Just make sure you keep good records of your expenses and know which ones need to be split between personal and rental use. The only time I'd pay for a professional is if you have multiple properties or complicated situations like 1031 exchanges.
What deductions are people commonly missing with rental properties? I always worry I'm leaving money on the table even with TurboTax.
14 Going back to the original question about hobby vs self-employed income, one thing nobody's mentioned is the self-employment tax. If you file as self-employed, you'll pay an additional 15.3% tax on your net profit for Social Security and Medicare. For hobby income, you don't pay this tax. With your small amount of income, the self-employment tax might actually cost you more than what you save from deducting the developer fee. Run the numbers both ways before deciding.
1 I hadn't even considered the self-employment tax! That's a really good point. If I go the self-employed route, I'd be paying 15.3% on the profit after expenses. But if I go the hobby route, I'd pay regular income tax on the full $160 without being able to deduct the $125 developer fee. Let me see... If I file as self-employed, my profit would be $160 - $125 = $35, and I'd pay 15.3% on that plus my regular income tax rate. If I file as a hobby, I'd pay just my regular income tax on the full $160. Hmm, this actually makes the hobby route seem better financially in my case. I need to calculate this more precisely. Thanks for pointing this out!
14 You're welcome! That's exactly the kind of calculation you should be doing. Just to add one more thing: remember that with self-employment, you can deduct half of the self-employment tax from your income. That helps a little. Also, if you think your app income might grow in the future, establishing it as a business now could be beneficial long-term, especially for building retirement savings through a SEP IRA or solo 401(k) once the income justifies it. Just something to keep in mind if you see potential for this to grow beyond covering just the developer fee.
7 Has anyone used TurboTax for this kind of situation? I have a similar issue with small YouTube ad revenue, and I'm wondering if TurboTax handles this well or if I should use something else.
19 I used TurboTax for my Etsy shop income last year (about $500). It handled both options fine, but I found the questions for the Schedule C to be easier to follow than trying to figure out where to put hobby income. They walk you through the business vs. hobby test and help you choose which approach makes sense.
Just want to add another perspective - I'm an accountant and see this issue ALL THE TIME with side hustles. Here's a quick breakdown: 1. Any business activity should be reported on Schedule C regardless of profit/loss 2. Business losses can offset other income, potentially reducing your total tax bill 3. BUT be careful - if you show losses for multiple years, you risk the hobby classification 4. To protect yourself, document your "intent to profit" - business plans, marketing efforts, etc. 5. The 3-out-of-5 years profit test isn't absolute, but it's a good rule of thumb For your specific situation, I'd recommend amending the most recent unprofitable years if you're still within the 3-year window. Beyond that, probably not worth the effort unless the losses were substantial.
Thank you for breaking this down so clearly! My photography losses weren't huge (between $800-1500 each year), but it sounds like I should still file the amended returns. Do you think I should include some kind of explanation letter with my amendments to explain why I'm filing them now? And how do I document "intent to profit" for past years?
Yes, I would definitely include a brief explanation letter with your amendments explaining that you recently learned about the requirement to file Schedule C even with losses. The IRS appreciates transparency, and this shows good faith. For documenting intent to profit for past years, gather any evidence showing you were serious about the business - things like business cards you had printed, websites or social media accounts promoting your services, photography equipment purchases, workshops or classes you took to improve your skills, client communications, or advertising efforts. Even a basic business plan or rate sheet from those years would help. The key is showing you were genuinely trying to make the business profitable, not just pursuing a hobby.
Has anyone used TurboTax to file amended returns for Schedule C? I'm in a similar situation and wondering if I can just use that instead of paying an accountant. Their software claims to handle amendments but I'm nervous about messing up.
I used TurboTax to amend my 2020 return to add a Schedule C for my candle business. It was pretty straightforward - you just indicate it's an amendment, enter your original return info, then make the changes. The software recalculates everything and generates the forms. Just make sure you have good records of your income and expenses from that year.
Isabella Santos
Don't forget that you should also factor in any improvements you made to the land during those 3 years. Even things like a survey, running utility lines, clearing trees, or building a driveway can increase your basis. I've owned several properties and the IRS has never questioned improvement costs as long as I had receipts.
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Ravi Sharma
ā¢Does fencing count as an improvement? I put up a fence around my property last year and I'm planning to sell in a few months.
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Isabella Santos
ā¢Yes, fencing absolutely counts as a capital improvement that adds to your basis. It's considered a permanent addition to the property that adds value. Make sure you keep all receipts showing what you paid for materials and installation. If you did the work yourself, you can include the cost of materials but not your own labor. Other things people often forget to include are land clearing, grading, retaining walls, drainage systems, and even certain permits or impact fees if they were required for the improvements. Every dollar you can document as an improvement will reduce your taxable gain when you sell.
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Freya Larsen
Anyone know if paying down the mortgage principal early counts toward your basis? I paid extra $12k toward my land loan to reduce interest.
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Omar Hassan
ā¢No, that doesn't count toward basis. Your basis is your purchase price + acquisition costs + improvements. Just paying down your loan faster doesn't change that calculation.
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