Post-busy season reflections
It seems like every year there is something new in the tax code that throws a wrench in my gears. This 2026 busy season the most obvious change was the 2025 Tax Act, formerly known as the One Big Beautiful Bill.
Anyway, now that we are post-busy season I have some reflections that I want to list here:
The average taxpayer is unaware of the mechanics of tax law and get most of their information from social media like Tik-Tok. I understand that social media is ubiquitous and if information comes at you fast and furious it seems authoritative, but setting up and owning an LLC is not a tax loophole to deduct your Mercedes G wagon, and please do not deduct personal expenses like your dog’s food as meals expense. Proper bookkeeping is necessary throughout the year, at the very least set up a business bank account and credit card and only use the business’ money for business related purchases.
This year we got two new tax provisions in the tax law that had people excited, no tax on tips and no tax on overtime. The no tax on tips deduction is helpful for those already in tip-heavy occupations, like servers, bartenders and baristas. The no tax on overtime deduction is applicable on the half in time-and-a-half. Both of these deductions max out at $25,000 and start phasing out at AGI over $150,000 if single ($300,000 married filing jointly). I had to ask clients to provide their last paystub in 2025 to get their year-to-date overtime, divide that amount by three, then deduct that amount. The IRS had already said before busy season that they were going to be lenient on no tax on overtime deductions for the 2025 tax year to give employers time to get on board with reporting this correctly.
The IRS loves examining returns with Schedule C losses that never seem to have revenue or show net profit. The hobby loss rule found in Internal Revenue Code section 183, says you must show profit in three of the last five years in your business, otherwise the IRS has the power to reclassify your business as a hobby and therefore treat your hobby loss as a personal loss, which is not deductible. Way too many tax preparers get creative with Schedule C for their clients, I mean creating fake businesses and pulling deductions out of thin air, that’s a big ethical no-no from this CPA.
The IRS was gutted in 2025 because of Elon Musk’s DOGE, politics aside, what this means is the IRS is now understaffed, and they will be operating slower for many years to come. The IRS has always been slow but very powerful, and now it is slower than ever before. Taxpayers may want to push the needle more on their deductions like the aforementioned dog food as meals expense. I would steer taxpayers away from trying that because the IRS has a statute of limitations. The IRS generally has three years to audit a return, six years for substantial understatements, and ten years to collect unpaid taxes, with exceptions for fraud or failure to file. That’s a long time to catch mistakes.
I reviewed tons of consolidated 1099 forms, interest, dividends, capital gains, tax-exempt interest the list and pages go on and on. Not every tax preparer reviews the pages of the dividend detail to find funds that have more than 50 percent of its assets invested in California municipal bonds, which is excludable for California state tax purposes. The same goes for US treasury interest in several states. Not every tax preparer pro-rates investment advisor fees for deductibility based on a function of state taxable income over total taxable income.
Sometimes other tax preparers don’t take the time to review each form and statement that prints with the tax return. The usual mistakes I see are misclassifying passive and non-passive activities on Schedule E, thereby limiting the amount of losses that can be deducted. Mistakenly including non-passive income on the Net Investment Income Tax Form 8960 and computing more tax than necessary. Mistakes with tax depreciation rules like using the improper asset lives for fixed assets. Luxury vehicles have a special unfavorable tax depreciation rule which limits the amount of depreciation you can deduct every year. Vehicles with gross vehicle weight ratings (GVWR) over 6,000 pounds are treated as equipment and get to be bonused 100 percent on the federal return and are available for section 179 expensing. Land improvements, like parking lots, fences and walkways are depreciated over 15 years not 27.5 years or 39 years. I can go on and on.
Not every tax preparer knows how to treat RSU’s, ISO’s and NQSO’s on a tax return. ISO’s for example are not taxable when exercised, but the spread between the exercise price and fair market value is included as an AMT adjustment. The shares when sold are then treated like long-term capital gains if held for more than one year after exercise and two years from the grant date. In my opinion, hiring a CPA to correctly report these forms of stock-based compensation is worth it to avoid the headache of amending a tax return.
That’s it for now and I will be hopefully posting more often with deep dives into many more tax topics. Time for some R&R.
